Correction appended.
Federal coffers and greenhouse gas emissions reduction efforts would benefit if royalty rates for coal mined on public lands were raised, according to a new White House report.
The White House Council of Economic Advisers (CEA), an executive branch agency that advises the president on economic policy, found as much as 32 million metric tons annually of carbon emissions could be saved under a change in the way payments are collected on federal coal.
"What this report aims to do is to ask the question: If you raise the royalties on coal, what will it do in terms of revenues, in terms of the environmental impact, the impact on coal?" said James Furman, chairman of the CEA.
The 33-page report, launched yesterday at an event at the Washington, D.C.-based think tank Resources for the Future, examines the economics behind federal coal royalties. It comes amid a hot debate in states about the Interior Department’s plan, announced in January, to halt new federal coal leasing for three years while it conducts a comprehensive review of the program.
The study only examined whether the federal coal leasing program provides a fair return for the American taxpayer. Furman said the report does not recommend any policy actions, just models suggestions.
It utilized IFC International’s Integrated Planning Model, which is used by U.S. EPA and the Federal Energy Regulatory Commission, among others, to estimate the effect of how changes to the federal coal leasing program would affect the coal market, rates of federal coal production and royalty revenues.
The authors simulated what would happen to the coal market under four scenarios in which the royalty rate paid for a ton of coal increased. The current royalty rate is 12.5 percent.
They included changing royalties to reflect coal prices based on regional coal markets, based on nonfederal nationwide coal prices, to match with natural gas prices and finally if rates were changed to maximize return to the taxpayer.
All scenarios result in additional revenues for the federal government. The first three would result in small increases in the amount of coal mined from eastern mines, a small reduction in coal mined in the western Powder River Basin and overall modest reductions in all coal mined in the U.S.
"These actions wouldn’t do anything like kill the coal industry," Furman said.
A ‘tax avoidance manual’?
The report says the program "has been structured in a way that misaligns incentives going back decades, resulting in a distorted coal market," and the result is that federal coal is now sold at artificially low prices and that is distorting the entire American coal market and cheating the country of revenue.
Under the federal leasing program, lessees pay what’s known as a bonus bid from an auction, which ensures their right to lease the land, fees to rent the land and the 12.5 percent royalty on the sale price of any coal produced.
The Interior Department has come under fire by environmental groups and watchdog agencies in the past for not getting a fair return on leases. A 2013 Government Accountability Office report found that between 1990 and 2013, Interior leased 107 coal tracts, and 96 of them had just one bidder in the bonus bid leasing auction.
Another concern expressed in the CEA report was that companies leasing coal have been able to claim deductions against royalty payments for certain costs — such as the washing and transportation of coal — and thus are paying less return than is warranted in royalty payments.
"One of the things I learned is a whole manual on how to game the system," said Adele Morris, a senior fellow and policy director of the Climate and Energy Economics Project at the Brookings Institution. "It’s maybe not a tax evasion manual, but certainly a tax avoidance manual, and it’s really impressive all the different ways coal companies can reduce the royalties that they pay."
Coal companies, industry groups and some members of Congress decried the findings and the council.
Logan Bonacorsi, a spokeswoman for Arch Coal Inc. said in an email that "’reform’ efforts intended to keep federal coal in the ground are counter-productive, and are almost certain to reduce or eliminate, rather than increase, the value the public receives for this essential national resource."
Coal companies, GOP blast report as ‘card stacking’
The National Mining Association called the report "the latest assault from the ‘Keep It in the Ground’ movement."
In a statement, House Natural Resources Chairman Rob Bishop (R-Utah) also questioned the objectivity of the CEA analysis.
"Once you scratch through the thin veneer of objectivity, this report is nothing more than card-stacking from the President," he said. "I appreciate this attempt by the White House to create a semblance of credibility for this moratorium, but this type of propaganda is beneath the Council of Economic Advisers."
Coal company Cloud Peak Energy Inc. called the CEA analysis "self-serving."
"In what is essentially a compendium of talking points from the Sierra Club, Northern Plains Resource Council and other anti-fossil-fuel groups, this advocacy paper panders to the administration’s green elite donor base," said Rick Curtsinger, spokesman for the company.
In earlier comments submitted to the Interior’s Office of Natural Resources Revenue, Cloud Peak argued that changing the way royalties are paid on coal to account for all costs — transportation, production, refining costs — is unnecessary, and the current valuation of coal leads to a proper price in the marketplace.
Still, regardless of whether coal is valued correctly in the market, Michael Greenstone, director of the Energy Policy Institute at the University of Chicago, said Interior has an obligation to consider other costs to burning coal, including to the environment.
Accounting for externalities — an economic term for indirect effects on the parties producing or consuming a good — related to the environmental costs of coal is another important consideration, the report notes, although outside its purview.
In terms of coal, the climate change effects from carbon emissions generated when the coal is burned is perhaps the best-known negative externality. Assessing royalties payments based on the price of regional coal, for example, would reduce carbon emissions 12 million metric tons annually, the report found.
On the other hand, Greenstone said it should be recognized that coal has been a relatively inexpensive source of energy that has powered the United States for decades.
Helping coal communities
During its comprehensive review of the program, Interior has the opportunity to account for both, he said. In doing so, the American people would both get a fair return on their coal resources, but would ensure only the fossil fuels that do more good than harm are used.
"Leases should return at least as much as the damages fossil fuels are going to do," he said.
Greenstone said he believes the best way to achieve that parity is by incorporating the social cost of carbon into the federal coal leasing process. At $40 per metric ton, the social cost of carbon — a measure Greenstone helped develop — is a figure meant to help federal agencies quantify the estimated economic damage associated with an increase in carbon dioxide emissions in a year.
His own calculations find the climate damage associated with using coal from federal lands amounts to $30 billion of CO2 released each year from 2003 to 2014. On a dollar-per-British-thermal-unit basis — a Btu is a measure for energy — the carbon emitted by Powder River Basin coal is six times greater than its market value.
Sharon Buccino, director of the land and wildlife program with the Natural Resources Defense Council, said the report reinforces — whether you are part of the Keep It in the Ground camp or just looking at the Interior Department to take a look at a program last reformed more than 40 years ago — that there are significant revenue and emissions reductions opportunities just in altering royalty rates.
By not permanently extending the current three-year moratorium on new federal coal leases, that could provide much-needed dollars to coal mining communities affected, as the resource is eschewed for natural gas and other lower-carbon energy sources.
"We knew going into this conversation and before this report that there are a lot of good reasons to end new leasing of federal coal because it addresses climate change, land, water and health impacts," Buccino said. "What this report makes very clear is by turning to a pricing mechanism you are providing potential revenue to mining communities."
Correction: An earlier version of this story misstated the amount of climate damages that would come from burning coal from federal lands annually between 2003 to 2014. It is $30 billion, not 30 billion tons.
