The apparent shift in the global energy market from coal to natural gas has shaken fossil fuel markets. As Australian resource exporters are keenly aware, this tilt has pushed seaborne coal prices down and improved the prospects for ocean-shipped LNG.

This change of fortunes for coal and gas has led to some unexpected and unwelcome arbitrage opportunities.

Some gas-fired utilities in Europe have switched back to burning coal, some of it displaced from the US by even cheaper shale gas there. And while Europe will in the longer term pay up for renewables and Russian gas in order to steer away from coal (which is dirtier than gas in terms of pollution and emissions), developing countries will embrace coal as a cheap energy source.

Nowhere is the reign of Old King Coal more resplendent than in China. In Global Exhaustion, the analyst Andy Lees remarks that 'it was the demand for coal that drove China's growth in the last twenty years, not the other way around.' Ultimately, he argues, China's boom is underpinned by resource exploitation. China will surely lower its energy intensity over time, but Jevon's Paradox (or 'rebound effect') predicts that improving efficiency won't lower overall energy use. In fact, it has the opposite effect.

The undesirable effects of burning coal are all too obvious. China's cities need gas. But coal now has become irresistibly cheap, especially from the landlocked mines in western China, which must freight a long way to port. Whence lies the perverse course now being pursued by some Chinese energy companies: to transform coal into gas, at the mine, and then to pipe the gas to coastal cities as a 'clean' fuel. The term 'synthetic natural gas' (SNG or syngas) was invented for this product, and it is as oxymoronic as it is cynical.

The origins of SNG are revealing. During World War II, with the Allies advancing on its oilfields in the Caucasus region, Nazi Germany developed a process of gasifying Ruhr coal as a wartime substitute for oil. The technology was further advanced by apartheid-era South Africa in response to oil embargoes. Strategically speaking, this is a technology pursued by besieged states.

Gasification of coal to SNG is a high temperature process that guzzles water and emits CO2 in alarming quantities. One thousand cubic meters of SNG (equivalent to about 6 barrels of oil) uses 2-3 tonnes of coal and thrice that weight in water

China has plans for 30 billion cubic meters (bcm) of SNG annually by 2015. To put this in context, China today imports about 30bcm of piped natural gas annually from Turkmenistan and another 30bcm via LNG. Tallying up all 28 SNG projects on the drawing board, capacity could reach 100bcm by 2018. At this upper range, SNG would gobble up 20% of industrial water in Xinjiang and Inner Mongolia.

SNG is bad economics, bad science and an environmental catastrophe.

The economics work today only because coal is cheap and gas prices are high; but it's highly vulnerable to longer-term price shifts. Also, SNG makers assume water is abundant and virtually free, at only 2% of total cost. That is a blatant mispricing. China is already in disagreements with its neighbours over its capture of water. In theory, some process water can be recycled, but coal is a notorious source of carcinogens known as BTX volatiles, which are expensive to remove.

The science is dubious too, because the SNG process converts a relatively high-quality energy source (coal) to a lower quality state (gas), and consumes a lot of energy in doing so. Thus the efficiency of conversion is low.

Finally, from an environmental perspective, the CO2 emissions from SNG production are much higher than conventional natural gas, and even worse than burning coal for power directly.

In effect, SNG is trading off global CO2 emissions and local water consumption for cleaner air in China's biggest cities. This is a classic 'externality', where one community benefits while outsiders suffer the costs. Chinese policymakers are well aware of this dilemma, which makes the SNG boom all the more puzzling. What is striking is the ambition of Chinese plans versus the widespread scepticism of SNG worldwide and inside China itself.

I do not hold the view that China has a special responsibility to contain its per capita carbon consumption below that of developed nations; that request would be unreasonable and probably futile. But the wanton resource abuse of SNG is the wrong path to growth.