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New Report: THE NECESSARY STEP. The impact of mining restructuring on the economy and energy security

THE NECESSARY STEP. The impact of mining restructuring on the economy and energy security

 

 

KEY CONCLUSIONS:

 

  • Subsiding hard coal mines until 2049 is the key element of the social contract for the mining industry signed in May 2021. This solution is presented by the government and trade unions as the sole method of avoiding a serious economic shock in Silesia and ensuring the coal supply for Poland’s energy security. However, this thesis is not confirmed in the data and historical experience of the region. 
  • The actual alternative to a long-term operation support for unprofitable mines is the restructuring of the industry on the basis of market price signals and with the use of the existing protection mechanisms (SRK). Due to the considerable variability in the extraction capacity of the material in Silesian mines, only some of them will have to be closed in order to restore financial equilibrium in the industry. 
  • We estimate that, within a short period, a reduction of 12 million tons of thermal coal extraction relative to the variant with the social contract will be necessary (from 32 million tons to 20 million tons in the Silesian mines covered by the contract). Due to the simultaneous drop in the demand for coal, this will not lead to increased imports above the levels observed in the preceding years. Moreover, the further decrease in extraction until 2030 is fully consistent with the expected reduction in demand for thermal coal in Poland. We estimate that in the restructuring variant in 2030, its extraction in all productive mines in Poland will be approximately 24 million tons (of which 9 million tons in the Silesian facilities covered by the social contract), with an annual demand of approx. 26 million tons. Thus, subsidising unprofitable mines is not required to maintain Poland’s independence from imported coal in the perspective of 2030. 
  • Lack of operational subsidies and focusing the extraction only on profitable facilities means reducing employment in the industry by approximately 20,000 people compared with the variant with the social contract. In the restructuring variant in 2030, the employment in the Silesian mines covered by the social contract will be 10,000 people compared with the approx. 45,000 at present. What is important here is that a considerably slower decrease of employment in coking coal mines can be expected because they are characterised by a higher raw material value and much more productive private mines. The scale of the predicted decrease in the number of jobs does not differ from the two previous restructuring waves in 2001-2006 and 2013-2017. 
  • Analysis of regional economic indices shows that, over time, the impact of mining on the Silesian economy is declining, and the fluctuations on the job market and economic activity in the region are mainly affected by the national economic situation. Mining restructuring in the period 2013-2017 coincided with a decrease by over half in the number of the unemployed and discouraged from looking for work in the Silesian voivodeship, with the concomitant increase in employment in industry and market services that surpassed the job loss in the mining sector by over three times. 
  • The data concerning professional activity in the Silesian voivodeship indicate that the key problem of the employment market remains the relatively high passivity of men aged 45-64, related to the possibility of earlier retirement for mine employees. Significantly, this situation results from the functioning of the industry as such, and not from the current influence of restructuring processes (fluctuations of the economic situation). Thus, the postponement of closing unprofitable facilities will lead to a prolonged low professional activity in the voivodeship, greatly increasing the number of people in their thirties and forties entitled to mining retirement. 
  • The differences in remuneration between the mining industry and other sectors, and not the absence of alternative jobs is the key barrier for the miners’ acceptance of the industry restructuring. The average salary in the Silesian voivodeship is approximately 40% lower than in the mining industry and about 30% lower than in the mines covered by the social contract. Application of protective mechanisms, such as severance pay related to the need to take up and maintain employment outside the industry (currently corresponding to about a 4-year difference of income between the liquidated workplaces and the region’s average remuneration), would alleviate the negative impact of restructuring on the income of the employees, without blocking them from retraining. 
  • The effect of restructuring on the finances of local governments is significant for the mining municipalities. The key effect is related to the loss of fees resulting from the functioning of a mine on the area of the municipality, and not from the decrease of PIT income, particularly including the effects of protective actions. We estimate that these municipalities would lose approx. PLN 70 million per annum on the fees obtained from mines in the restructuring variant in the short term and approximately PLN 140 million per year in 2030. The decreased income from PIT would amount to approximately PLN 20 million and 40 million per year. The direct compensation from the State Budget for the local governments of this lost income would be linked to a considerably lower cost than covering the operating losses of the mining industry by subsidising mines. In the upcoming years, local governments in the Silesian and Lesser Poland voivodeship will be granted access to the resources within the Just Transition Fund (a total of EUR 2.9 billion for the two regions), which will enable them to modernise the local economy in a manner that increases the attractiveness of the former mining municipalities for the industrial and service investors. 
  • The existing regulatory framework and available support tools are sufficient to avoid a severe economic shock in Silesia and the deterioration of the energy security of Poland without the need for the long-term subsidising of unprofitable extraction facilities, which is provided for in the social contract. The remaining challenge is the development of solutions acceptable for the employees leaving the sector and for the mining municipalities, without placing a burden on the rest of the employees with the transformation costs. It is also desirable to reduce the economic stimuli discouraging the sector’s employees from retraining. Thus, we propose: 
  • modification of the current form of the social contract for the mining industry in a manner that assumes resignation from the operation support for unprofitable facilities and establishing a schedule for the phasing out of mines based on the profitability of extraction, 
  • change in the rules of payments for employees leaving the sector in the direction of spreading part of the payment over time and linking it with taking up and keeping a job in another industry (activation allowances), with a simultaneous increase in the total amount paid in terms of the support provided (incentive factor), 
  • offering packages supporting the change and improvement of qualifications for all people changing their profession and industry, in an open manner for all categories of employees of liquidated mines (not only for miners) and in cooperation with investors (trainings for the jobs being opened), 
  • modification of the current principles of obtaining retirement rights by miners: departure from the current one-time obtainment of the entirety of rights for earlier retirement after reaching the required seniority towards a gradual reduction of the retirement age after every year worked in a mine. Such a solution will enable resignation from the use of mining leaves and it will eliminate the significant factor discouraging retraining: changing the industry is linked to the complete loss of potential retirement benefits resulting from the current seniority stage. 
  • supplementation of the social contract with direct financial support for local governments covering the lost budget income from the fees obtained from the mines. Loss of income related to PIT will be alleviated by activation and protection measures directly targeting the employees leaving the sector.  

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