Hardly a ‘War on Coal’

If it were true that the government is waging a war on coal, it could easily be convicted of aiding and abetting the enemy. The government actually uses its budgetary and regulatory powers to provide subsidies and other benefits to the coal sector worth many billions of dollars per year.

By Robert Repetto on April 4, 2016

If it were true that the government is waging a war on coal, it could easily be convicted of aiding and abetting the enemy. The government actually uses its budgetary and regulatory powers to provide subsidies and other benefits to the coal sector worth many billions of dollars per year.

Several big coal producers have gone bankrupt, and others are on the ropes, but it’s not because of the administration’s Clean Power Plan, which won’t even be partially implemented until 2022, or because of other pollution control measures.

The main reason is competition from natural gas. Natural gas plants are now cheaper to build and operate. In some regions, competition from wind and solar is also important because those costs have come down dramatically. A third reason is the sharp decrease in the demand from China for metallurgical coal, which has fallen as the Chinese economy slows down and excess steel production has been cut back.

Employment in coal mines has been falling for decades, even when production was rising, as the industry became more highly mechanized. Mine workers should blame management, not the government, for the loss of jobs.

In fact, the federal government provides massive support to the coal industry. In the tax codes there are generous tax breaks for coal mining. The Treasury Department estimates these are worth about $300 million to the industry every year. In addition, the Department of Energy budget for 2016 includes almost $400 million in support for research and development of coal sector technologies, such as carbon capture and storage, which is unlikely ever to become cost-effective. The current budget of the Office of Surface Mining provides $117 million to reclaim a small fraction of the 5000 abandoned coal mines polluting the landscape, $124 million for regulation of the industry, and $340 million in payments (net of fees) to United Mine Workers Health Plans. Even more, the Black Lung Disability Trust Fund, which is supposedly financed by levies on coal production, is $5 billion in the hole, a liability which the federal government will have to take over as coal mining diminishes. Scattered through other agencies are tens of millions of dollars in other financial supports, such as grants from the Dept. of Commerce for depressed mining communities in Appalachia and $175 million from the Dept. of Labor to protect mine worker safety.

Forty percent of US coal output is mined on public lands under very generous terms. Mining companies bid for mining leases on public lands and then pay royalties on the coal extracted. Royalties are assessed at 12.5% on surface mines and 8% on underground mines, compared to 18% for oil and gas extraction. Even then, coal companies often apply for and receive royalty relief, even retrospectively after production has ceased. After renegotiation, the effective royalty rate has been only 5%.

Almost all leases for coal mining on federal lands have been granted with only a single bidder, and the BLM has accepted very low bids – averaging less than a dollar per ton. BLM sets minimum “fair market value” on the basis of recent sales bids, rather than expert assessments, thus perpetuating the subsidy. They’ve allowed potential bidders to specify the tracts to be bid on, often adjacent to their existing lease holdings, suppressing competition. The BLM has been allowing lease expansions up to 950 acres at these minimum prices. If that weren’t enough, the BLM has accepted industry’s estimates of the amount of coal in the leases without verification, and the coal actually mined under these leases has already exceeded the coal reportedly available by 30%.

The BLM coal leasing program is now under review, and new leasing has been put on hold. However, at least a 20-year supply of coal is already under lease; these leases will not be affected, nor will new ones already being processed or extensions to existing leases.

The federal government has already spent $5 billion cleaning up abandoned mine sites and faces at least as much in future reclamation costs. Nevertheless, the BLM has allowed companies to “self-bond” the money needed for reclamation, essentially just handing over IOUs, leaving a huge potential gap in financing when these companies weaken financially. The four largest coal companies have more than $2.6 billion in reclamation costs covered by self-bonding provisions. Two of them, Arch and Alpha, which have declared bankruptcy, have been allowed to pay only 10 to 15 cents per dollar of self-bonding obligations.

In addition, the coal industry has benefitted from weak environmental regulations that allow coal-fired power plants to avoid pollution control costs but impose heavy health and other costs on the American public. Pollutants include particulates, sulfur and nitrogen oxides, and heavy metals such as mercury, arsenic and selenium.

These emissions have been so large that the coal-fired electric power fleet imposes air pollution costs that exceed the value added by the electricity they generate. A 2011 study by three Yale economists found that coal-fired power plants created pollution damages of $53 billion per year (at year 2000 prices), more than twice the value added in the industry.

Many of the dirty and inefficient coal-fired old power plants now being retired have been kept going for decades because of exemptions from the pollution controls required on newer plants. Sixty percent of the coal-fired power stations are more than 40 years old.

In addition, the coal mining sector has been allowed to continue with mountaintop removal that has polluted thousands of miles of rivers and streams in Appalachia. Disposal of coal mining and combustion wastes, health impacts in mining communities, and other environmental costs have been estimated to add tens of billions of dollars more in annual damages.

The coal sector has become increasingly international through its growing exports and imports. Worldwide, coal still receives massive subsidies. The International Monetary Fund estimates that in 2015 coal and electricity, which is largely coal-fired, were subsidized by approximately $100 billion per year. Large as this is, it pales by comparison to the IMF’s estimate of coal’s worldwide air pollution damages, which exceed $2.5 trillion per year, excluding damages associated with global warming.

The reality is that coal’s market share in energy markets will continue to decline because of its heavy environmental costs, the rapidly falling prices of clean energy technologies, and coal’s rising mining costs as the best and most accessible deposits are depleted.

Our concern should be for displaced workers and for coal-dependent communities, because they have limited mobility and few alternative economic options in coal mining regions, such as Appalachia and Wyoming. The capital invested in the sector is far more mobile. Much capital has already left as investors have sold their shares, banks have cut back on new loans, and companies have shed their debts by filing for bankruptcy protection.

It would be entirely appropriate for the federal government to make the coal industry pay more of its costs, including the health and environmental damages it creates. The added government revenues could be used to support displaced workers and coal-dependent communities.

Moreover, states have wide flexibility in deciding how to comply with the Clean Power Plan’s emission standards and can use that flexibility to protect their coal-based industries. For example, they can spread emission reductions broadly across the transportation and other sectors of the economy rather than concentrating them all in the electricity sector.

Many states are designing cap-and-trade systems similar to those already operating in California and the Northeast, as well as in Europe and China. Within such systems, states can allocate valuable, salable free permits to the power sector for a transitional period. This would protect it financially. State could also use revenues gained by auctioning other permits to support displaced workers and depressed communities.

When the government acts to defend the taxpayer, public health and the environment against the coal sector’s onslaught, it’s not a war on coal – it’s protecting the American people.

This article was originally posted on the Energy Future Coalition website on March 28, 2016 and is reprinted here with permission.

Insight details