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Coal: Economics versus Emotions?

COMMENTARY

Coal
Economics versus Emotions?

Andrew G/yn
On 13 October 1992 the British government sanctioned the
closure by British Coal of 31 collieries by the end of the year. It
completely miscalculated the scale of public response, especially
from such unlikely quarters as the streets of Cheltenham and the
pages of the Sun and Express. The outcry owed some of its
strength to the feeling, shared by many Tories, that it must be
crazy to throw tens of thousands on to the dole queue when they
could be working a valuable resource to the country’s benefit. But
was this essentially an emotional – even nostalgic – response to
the decline of a once great industry and the communities on which
it was built? The government deployed a straightforward economic case to justify the closure programme. To see if this was
really a confrontation between emotion and economic science,
that case must be examined.

The government’s first argument was that the coal industry
had absorbed, and was currently absorbing, unsustainable amounts
of public money. Agriculture Minister Gummer warned, on a
Sunday morning religious affairs programme, that the continuation of such subsidies would require cuts in welfare spending. The
Prime Minister himself claimed that £ 100 million of public
money each month was going to subsidise the 31 collieries. Since
this almost precisely equals their total production costs, it could
only be true if the coal produced was worthless. In fact around 80
per cent of their coal was being sold at a price which covered its
costs of production. Even were the rest (which was being stockpiled) valued somewhat lower (say, the world market price which,
at the outside, was about£1 0 per tonne less than production costs),
this would imply a loss of less than £ten million a month. The
Department of Trade and Industry hastily claimed that the £ 100
million represented the impending situation in 1993/4, if the pits
could not sell their coal to the electricity industry. But even then
the exaggeration would be gross; coal could be sold on world
markets, and with the decline in the pound the world market price
is rising. And in any case, the figure was very explicitly applied
to the present situation and used to justify the extreme haste of the
closure programme.

Trade and Industry President Michael Heseltine repeatedly
conjured up the picture of a government shovelling endless
subsidies into the coal industry, claiming that public aid since
1979 amounted to more than £400,000 for each miner currently
employed. But more than half of the £19 billion of transfers from
the government were simply book-keeping transactions arising
from the anomalous financing pattern of British Coal and its
subsequent capital reconstruction. A further quarter represented
social and restructuring grants for redundancy, redeployment and

Radical Philosophy 64, Summer 1993

early retirement; but this was explicitly aimed at running down the
industry, not sustaining -let alone expanding – it. Much of the rest
was finance for the investment which helped BC to double
productivity since the 1984-85 strike; any waste comes not from
the investment but from the abandonment of machinery in prematurely closed mines. By 1991-92 there was no deficit grant at all
and even the 31 threatened mines were virtually breaking even.

The government’s attempt to characterise miners’ jobs as
being dependent on enormous public handouts was based on
grossly exaggerated figures. The second argument for closure
was that next year the market for coal would shrink rapidly, as
electricity producers switched to other fuel sources, and that this
necessitated a sharp reduction in the size of the coal industry.

Heseltine reiterated that the electricity producers would not be
switching from UK coal unless the alternative was cheaper and he
warned that any attempt to interfere with such commercial logic,
out of sympathy with the miners, would threaten more jobs by
burdening British industry with uncompetitive electricity. This
argument about the benefits of shifting to cheaper electricity
raises much wider questions, based as it is on a set of presumptions
about the workings of a market economy. Showing how these
presumptions are misleading builds up the economic case for
retaining a substantial coal industry and illustrates arguments for
government intervention which are much more broadly applicable.

Private Benefits, Public Vices
It is helpful to divide this question into conditions applying within
the energy market (specifically, the choice of fuels for electricity
generation) and conditions obtaining within the economy as a
whole. Does the functioning of the energy market ensure the
cheapest electricity, from the perspective of electricity producers
and consumers? Is what appears to be the cheapest electricity the
best option for the country when the ramifications of the decisions
of electricity producers for the economy as a whole are taken into
account?

Simple textbook economics, with its assumptions of a perfectly flexible and competitive economy, answers ‘yes’ to both
these questions. The invisible hand of competition is supposed to
ensure that what is best for the individual producers is optimal for
the economy as a whole. Take the case of an individual electricity
producer deciding to switch from UK coal to gas (the basic cause
of British Coal’s loss of markets over the next few years). Since
the coal-fired power stations are in place, and the capital expen-

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ditures have already been incurred, the producer has to weigh up
their running costs against the total cost of producing electricity
from a new gas-fired station (capital costs, including interest, plus
fuel and other running costs). If gas won (and the older the coalfired stations, the more likely this result), this would mean that
resources should be shifted from producing coal to producing gas
(and building the station). If gas is cheaper, then more resources
(labour, in particular) are released from coal than will be absorbed
in producing the same quantity (in energy terms) of gas. A fully
flexible economy allows the extra resources to be employed
elsewhere, representing a gain in Gross Domestic Product and in
society’s real incomes. The benefits of lower production costs
would be passed on, through competition, to the electricity user.

Miners would be redeployed to jobs which would be more
productive than mining. After a relatively short transitional period nobody would suffer and everybody would benefit (exminers get cheaper electricity like everyone else). To interfere
with this process – by giving a subsidy to mining to outweigh the
cost advantage of gas for example – would simply freeze people
into unproductive jobs.

But was Heseltine right to assume that if the electricity
producers are switching to gas then it must be cheaper? Even if the
market for electricity were perfectly competitive, this claim
would have to be treated with scepticism. Markets are subject to
fashion and managers’ fears of being out of line often outweigh
the benefits of being right but lonely. The capital costs ofthe new
gas stations become irrelevant once they have been built, and they
may knock out coal-fired stations (and the mines that supply
them) even ifthe decision to build them was misjudged (just as the
Channel Tunnel, once built, would knock out ferry operators even
if it never provided an adequate return on its investment).

Even assuming that the’ dash for gas’ is warranted by current
cost advantages over coal, nobody knows if this will be true in ten
years’ time. (This issue is discussed in two excellent reports to
Steven Fothergill and Nigel Guy of the Coalfields Communities
Campaign (9 Regent Street, Barnsley, Yorkshire) called The Case
Against Gas and The End of Coal? See also Consequences of
Electricity Privatisation, evidence to, and report of, the House of
Commons Energy Committee, published in February 1992).

Prudent producers will therefore hedge their bets, and indeed the
two major generators, Powergen and National Power, have been
responsible for a substantial number of the new gas-fired stations.

But their diversification into gas may result in over-dependence
on gas for the economy as a whole. Whilst coal currently dominates electricity generation, in terms of total energy supply gas is
almost as important as coal. Indeed, until very recently it was
regarded as a premium fuel reserved for domestic heating and
some industrial uses. If gas assumes much of the base-load in
electricity generation this will imply increasing dependence upon
it and consequent vulnerability to ‘energy shocks’ (especially
since the life of the UK gas fields is very limited, unlike that of
coal reserves, and apart from Norway the other two major exporters into the European gas market are Russia and Algeria, hardly
reliable sources of supply). Moreover, closing mines, some of
which have long lives, will mean very heavy investment costs if
their seams are to be accessed in the future (assuming there would
be workers available with the appropriate skills). But both these
effects – over-dependence on gas for the economy as a whole and
undermining the future capacity of the coal industry – are irrelevant to the decisions of an individual electricity producer who

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switches from coal to gas. They are ‘externalities’ affecting the
economy as a whole, which are not expressed in the price system
in terms of costs of a particular course of action faced by an
individual producer.

These objections to trusting in market processes to achieve
appropriate patterns of energy use would apply even if the
electricity market really were highly competitive, which is obviously far from the case. Nuclear power, although uneconomic,
has a secure place and the rest of the market is dominated by
National Power and Powergen (the duopoly), albeit that their
position is under threat from independent producers – especially
from the Regional Electricity Companies (the RECs that used
simply to distribute electricity), which have protected segments
of the market. Under these circumstances ‘strategic’ actions,
aimed at weakening rivals’ positions, are widespread and there is
no guarantee that this promotes cheap electricity.

As far as the RECs were concerned, speed in entering the
generating business was of the essence, and gas stations are the
quickest and cheapest to build as well as having, on most scenarios for the next few years, cheaper total costs of production
than new coal-fired stations. The fact that their electricity will not
be cheaper than that from the duopoly’s old coal-fired stations,
whose capital costs were bygones, is irrelevant if the RECs can
guarantee the gas stations a profitable market. In effect, the
duopoly’s coal-fired stations would be forced out and their
productive capacity wasted. Not surprisingly, the duopolists were
well aware of this possibility and were therefore themselves
amongst the first investors in gas-fired stations. They thereby
secured the cheapest gas which, they hoped, would raise the costs
of the new producers and limit their competitive threat, as well as
diversifying their own – though not the country’s – sources of
energy. Their own actions in pushing up the price of electricity (by
an estimated 20-25 per cent as compared with what would have
happened if the industry had remained nationalised) had itself
made entry by the independent producers profitable. But, given
the duopoly’ s fears of investigation by the Monopolies Commission, the combination of high prices (and profits), together with
some new competition, represented the best outcome.

The Report of the Select Committee on Trade and Industry,
published in January 1993, made it clear that the gas-fired stations
would not provide lower-cost electricity than most of the coalfired stations they would displace. But over and above this, there
are broad ‘macroeconomic effects’ of switching from UK coal
which would support, under current circumstances, maintaining
the coal industry.

UK coal being replaced by UK gas is the simplest case. The
expansion of gas production would obviously increase employment in that sector. National output would be maintained, but
unemployment would rise since gas extraction is a much less
labour-intensive industry than coal mining. What is supposed to
happen is that the economy is sufficiently flexible for prices to
fall, demand to rise and workers to ‘price themselves’ into the
newly created jobs by accepting lower wages. Essentially: there
would be a redistribution of income from ex-miners to newly
employed gas workers and to owners of the gas industry.

This is not some academic quibble. The Thatcher years
indisputably saw increased productivity in UK manufacturing.

But this reflected fewer people producing roughly the same level
of output, rather than the same number producing more. Many of
those who lost jobs did not find new ones, or not for long. Thus,

Radical Philosophy 64, Summer 1993

instead of productivity growth bringing general prosperity, it
largely represented a redistribution from those who lost jobs to
those who gained or retained them, and above all to recipients of
profits and dividends.

In reality, the macroeconomic effect of the switch from UK
coal is even worse than this since it has involved a substantial shift
towards energy produced overseas. Imports of coal are now some
20 million tonnes (up from 3 million before the 1984 strike). The
likely increase in imports of gas is not yet clear. Eventually they
will grow, as UK gas reserves are run down quicker. But even in
the short term some of the gas will be imported (and much ‘UK’

gas is extracted by overseas companies whose profits go abroad).

What would a basic economics textbook say about the replacement of UK coal by an imported energy source? No problem. As people lost their jobs in UK coal, and demand switched
overseas, UK wages and prices would decline (or, alternatively,
the value of sterling would fall further). The result would be
booming demand for exports which would allow resources released from UK coal to move into export industries. And if the
imported energy is cheaper than UK coal, there would still be
some spare resources to be redeployed to other industries, allowing GDP to rise.

In the real economy, of course, wages and prices respond
stickily to rising unemployment, and exports respond but slightly
to exchange rate changes. The loss of jobs in one industry does not
rapidly lead to additional jobs elsewhere. Indeed, the loss of
incomes ofthose who stay unemployed has ‘multiplier’ effects on
industries supplying them with goods and services. Thus, without
the textbook’s ideal of full flexibility and a perfectly functioning
market system, the result would be persistent unemployment, a
fall in GDP, a deterioration of the balance of payments, and a
worsening government deficit through loss of tax revenue from,
and more unemployment benefit paid to, ex-miners. Some simple
calculations (see Andrew Glyn, The Economic Effects of the Pit
Closure Programme, report for the NUM, October 1992) suggest
that the closure of the 31 pits would lead to nearly 80,000 people
losing their jobs (including those in industries supplying the coal
industry and in local economies affected by the reduction in
incomes) and that offsetting increases in employment in the gas
sector might reduce this figure to around 65,000. In the absence
of automatic mechanisms within the economy to create substitute
jobs, the impact on unemployment would be a continuing one.

Even if individual miners found work, this would be at the
expense of somebody else. The length of the dole queue would fall
only if pit closures actually led to additional jobs being created.

The unemployment would increase the government’s deficit
by some £1.2 billion in the first year (when redundancy payments
would be made) and £0.5 billion thereafter (as the government
lost tax revenue from, and paid benefit to, those who lost their
jobs). This is important, since it measures costs to the rest of
society and shows that it is not only those losing their jobs who
lose out economically from the pit closures. The deficit increases
would lead to higher taxation, or – more likely – further cuts in
public spending programmes (contrary to Mr Gummer’s homily)
and thus additional unemployment.

The degeneration of electricity privatisation into such a shambles is of great significance. It was widely claimed that the
splitting up of the industry, so as to introduce competition,
represented a major step forward from earlier privatisations like
telecoms, where a monopoly position was much more nearly

Radical Philosophy 64, Summer 1993

preserved. There was to be no energy policy other than the
promotion of a competitive market as the best means of minimising fuel costs. But the release of market forces, from the safety of
the economics textbook into the complex reality of a far from
perfectly functioning economy, has been exposed as highly
destructive and wasteful.

Coal not Dole
There are many possible changes in the energy market which
could help to preserve the market for UK deep-mined coal. These
include running gas-powered generations on peak-load rather
than base-load and cancelling further gas generators, eliminating
electricity imports from France’s nuclear plants, accelerated
closure of old nuclear reactors, reduction of UK opencast coal,
and reduced imports of coal into the UK. All of them require
significant government intervention in the energy market (though
very little by way of subsidies, as the decline in the value of
sterling, and the continuing fall in costs of UK coal, have closed
the price gap between UK coal and alternative energy sources
such as imported coal). The Select Committee on Trade and
Industry suggested a mix of these measures (except for closure of
nuclear stations), which was reported as restoring about one-half
of the imminent cut in British Coal’s market. In reality, if
implemented in full, the Committee’s recommendations would
have preserved the market for deep-mined coal virtually intact.

The government is clearly quite uninterested in a proper
appraisal of the economic implications of pit closure, resting its
case on the presumption of a rapid creation of substitute jobs.

Thus the Department of Employment asserted, in evidence to the
House of Commons Employment Committee, that ‘very broadly
employment and unemployment should return to previous levels’. Heseltine claimed that ‘the cost of unemployment is a
temporary process as people find their way into market sustainable jobs’ – a truly incredible proposition as unemployment
climbs above three million. Inevitably, the repeatedly postponed
White Paper – the government’s response to the furore after 13
October – will be entirely an exercise in political, not economic,
cost-benefit analysis.

It is quite obvious that there should be some agency responsible for organising the whole energy sector (there used to be a
separate Department of Energy with a cabinet minister responsible for just that task). The present electricity ‘regulator’ ,Professor
Littlechild, a significant contributor to the academic literature on
privatisation, is charged merely with promoting competition and
protecting the consumer. Having some body responsible for the
development of the fuel sector (the mix of fuels, imports versus
home production, and so forth) would, he said (in answer to a
question at the House of Commons Select Committee on Trade
and Industry), go ‘quite a long way in quite a different direction
toward central planning’.

However much exaggeration is involved in associating an
energy policy with Gosplan, there is a serious underlying point.

As I have tried to show here, ‘Coal not Dole’ is supported by
economic logic as well as emotion. But it is an economic logic
which starts from a realistic appraisal of the functioning of the
economy, rather than the presumption that, with the appropriate
dose of competition, the individualistic decisions of economic
agents will ensure the best outcome for all.

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