Indexbit-White House: Raising Coal Royalties a Boon for Taxpayers, and for the Climate

The IndexbitWhite House Council on Economic Advisers presented a report this week that its chairman, Jason Furman, called “a real strong case for reform” to the federal coal leasing program.

The review, the first time that President Obama’s top economic advisers have weighed in on one of the most hotly contested issues on the climate policy agenda, found that reforms would both reward taxpayers and protect the climate.

Furman called the coal leasing system “antiquated” and said it falls far short of offering a fair return to taxpayers. Furman unveiled the report and a panel of four outside experts then discussed CEA’s findings at a seminar hosted by the research nonprofit Resources for the Future on Wednesday in Washington, D.C.

The report contains a sophisticated economic analysis that showed how increasing what the government charges companies in royalties for the coal they take from federal land not only raises revenue but reduces carbon emissions.

To maximize taxpayer returns from coal leasing, CEA estimates that future royalty rates for new coal leases would have to go up to about 300 percent, compared to the rate often used today (less than 12.5 percent). This move would rake in billions of dollars for state and federal governments and reduce coal production on federal land by about 50 percent. The resulting climate impact would be big: a reduction in carbon dioxide (CO2) emissions from coal combustion of 319 million metric tons annually.

CEA’s report comes six months after the U.S. Department of the Interior launched its first review of the coal leasing program in about 30 years. The review follows several lawsuits by environmental groups such as WildEarth Guardians. They have challenged the Interior Department for not adequately accounting for coal’s climate impacts as it reviews applications for new leases and expansions to existing ones, among other issues. Additionally, several studies have come out including a 2013 report by the U.S. Government Accountability Office raising questions about how federal officials estimate the fair market value of coal in the leasing operations.

The implications for the coal industry, however, are potentially crippling. U.S coal production last year hit its lowest levels since 1986, and several coal companies have filed for bankruptcy, including the nation’s top two companies Peabody Energy and Arch Coal Inc. Further reductions in revenue would be a particularly painful blow.

The National Mining Association decried the analysis. “There is no legitimate rationale for freezing coal leases and raising royalty rates on federal coal leases that are already valued above market,” the group said in a statement. “Discouraging production from federal lands and from further investment in this valuable energy resource will put at risk Americans’ most reliable, abundant and affordable source of energy.”

To better understand how changes to royalty rates would impact federal revenue and taxpayers, CEA studied how coal prices and royalty rates have been historically set. Royalty rates are supposed to be 12.5 percent the value of coal, as defined by the DOI; and companies may request royalty waivers, suspensions or reductions if they can prove they are needed to promote development on a given lease. But companies often are paying closer to 5 percent. Aside from the waivers, many companies are successfully challenging the government’s valuation of coal—by arguing, for example, they have particularly high costs for washing or transporting the coal—to reduce royalties.

This report “is a whole manual of how to game the system,” joked Adele Morris, a panelist at the Wednesday seminar. On a more serious note, Morris added the report clearly showed why “you don’t want to let coal companies choose their own coal price reductions and value the reductions in such an opaque way.” Morris is a senior fellow and policy director at the public policy nonprofit Brookings Institution.

When companies underpay on royalties, taxpayers get a bad deal—and sometimes other coal companies do too, concluded CEA. For example, companies operating on federal land such as the Powder River Basin price coal at around $10 per ton.That’s much less than the $30-$100 per ton prices for private land coal.

CEA evaluated four possible options for how the government should price its coal and royalties in the future, using 2025 as a target to allow time to phase in changes to the coal program. Assuming no changes were made, the model estimated the program would price coal at $2 per ton and royalty rates slightly above 9 percent.

In the first scenario, a program price for coal based on regional coal prices was estimated at $3 per ton and a royalty rate of 17 percent. This would lead to a small reduction in federal coal production, but CEA estimated coal production on private land in the eastern U.S. would actually increase slightly. The potential impacts to federal revenues ranged from no change to increasing by $290 million. Minimal reductions to CO2 emissions were also predicted.

The second and third scenarios involved different assumptions but produced the same results: an estimated coal price of $5 per ton and a 29 percent royalty rate. This would produce government revenues up to $730 million more than what’s collected today, further cuts to federal coal production and a minor reduction of CO2 emissions to the tune of 32 million tons of CO2 annually.

CEA’s first three scenarios were the main options to be explored, and it put together a more theoretical fourth scenario to show how high the royalty rate would need to be to maximize taxpayer returns. In this final case, coal was priced at $30 per ton and the result was staggering: about $3 billion in extra revenues, a halving of coal production and a greater annual reduction of CO2 emissions.

The CEA analysis took a sensible approach to handling climate change, offering an example for how to evaluate “good financing strategy of the coal industry” and simultaneously use “sound emissions policy,” said Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis.

That emissions policy would also be boosted by the Obama administration’s Clean Power Plan, finalized last year to reduce carbon emissions from power plants. The rule, however, was stayed by the Supreme Court and awaits review by the U.S. Court of Appeals.

According to CEA’s Furman, “If you didn’t have a Clean Power Plan there’s some evidence you could get a very substantial fraction of the emission reductions association with that plan [through] better pricing of coal.” Furman also said the analysis did not take into account the full suite of environmental impacts coal can have on the environment.

Still, coal’s not going away any time soon and these kind of changes would not “kill” coal, said Furman.

But political support for revamping the federal program is mixed. On Monday, 48 Democratic members of the U.S of House Representatives sent a letter to DOI head Sec. Sally Jewell urging the overhaul of the federal coal leasing program to ultimately benefit taxpayers and take into account coal’s climate impacts.

According to many Republicans in Congress, as well as the Republican presidential contender Donald Trump, the solution to coal’s market woes is loosening regulations on the coal industry and preventing the enforcement of the Clean Power Plan.