TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report

Coal mining is a major industry in NSW and a significant revenue source for the NSW Government. Most coal produced in NSW is exported and therefore the future of the industry is largely dependent on global demand.

In 2020, NSW’ 3 top thermal coal export markets – Japan, South Korea and China – all announced their intention to achieve net zero emissions by the middle of the century. Consequently, global demand and thus coal production is now projected to be significantly weaker than the long-term estimates presented in the 2016 NSW Intergenerational Report (IGR).

Consequently, global demand and thus coal production is now projected to be significantly weaker than the long-term estimates presented in the 2016 NSW Intergenerational Report (IGR).

The factors underpinning weakening global demand for coal – technological development and policy settings aimed at reducing greenhouse gas (GHG) emissions – will also impact domestic energy generation. All 5 of NSW' coal generators which, together, supply 84% of the state’s utility-scale electricity, are expected to retire over the coming 2 decades. Research by the CSIRO indicates that solar and wind generation, combined with storage technologies, will be the cheapest way to replace these generators. Alongside this, while 99% of light vehicles on NSW roads currently have internal combustion engines, the number of electric vehicles is set to grow considerably over coming decades.

It is fairly self-evident that declining global coal demand, relative to projections made in previous IGRs, will impact NSW’s economic and fiscal outlook. The domestic energy transition, however, also presents both risks and opportunities. This paper presents an approach to assessing the potential magnitude and scale of the economic and fiscal impacts of this transition for the 2021 NSW Intergenerational Report. It constitutes an indicative assessment of some transitional climate risks, and accompanies a separate paper An indicative economic and fiscal impact assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report, by the same authors, which focuses on a selection of physical risks of climate change.

This paper draws on output from Computable General Equilibrium (CGE) modelling as well as NSW Treasury’s Long Term Fiscal Pressures Model (LTFPM) to test the sensitivity of New South Wales’ fiscal and economic outlook to global coal demand.