Recouping coal's costs to taxpayers

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With one largely overlooked line in his State of the Union address, President Obama began a critical policy shift that will benefit both taxpayers and the environment.

"I'm going to push to change the way we manage our oil and coal resources, so that they better reflect the costs they impose on taxpayers and our planet," Obama said. On Friday, the Department of the Interior announced that it will pause all new coal leasing and launch a comprehensive review of the federal coal program to identify reforms that would better account for the environmental costs of coal production. When it comes to coal, these costs can add up quickly. Coal mining on public land accounts for more than 40 percent of all coal produced in the United States, and taxpayers cover a long list of federal coal production's social and environmental costs: methane and other greenhouse gas emissions, hazardous air pollution, and habitat disruption, among others. While Interior's review is just beginning, there is much that can be done to identify and recoup these costs.

In managing federal lands, Interior has the statutory obligation to earn "fair market value" for the American public when developing natural resources, and to balance energy production with environmental preservation. By using modern economic tools, Interior can illuminate coal's hidden costs and make straightforward reforms to the federal coal program, benefitting the American public.

According to new analysis by the Institute for Policy Integrity at New York University School of Law, if Interior had used a higher royalty rate for federal coal that accounted for the cost of methane emissions — a fraction of the total public costs of coal mining — it could have earned an additional $2 billion from 2009 to 2013 from coal production in Wyoming, Colorado, Montana and Utah.

The federal coal programs' flaws are numerous. A lack of robust competition for leases keeps prices low; minimum bids (which are supposed to serve as a floor price for leases) have not been raised since 1982; royalty rate deductions frequently bring companies' effective rates far below the 12.5 percent statutory minimum; and Interior's Bureau of Land Management (BLM) sometimes fails to account for coal's export value in its internal appraisals.

Moreover, the fiscal terms of federal leases fail to account for the many environmental and social externalities (or shared costs) imposed on the public by coal production. At the mine, these costs include greenhouse gas emissions, heavy water use, ecosystem effects and potential water pollution, to name just a few.

When fossil fuel production first began on leased federal lands nearly a century ago, the government lacked the tools to measure these impacts with any precision. Today, armed with the knowledge that methane emissions and other pollution from coal production impose significant costs on society — and the tools to measure those costs, such as the Environmental Protection Agency's (EPA) Social Cost of Carbon and Social Cost of Methane — Interior can and should account for these costs in both a programmatic environmental review and through fiscal reform.

For example, according to our analysis, Interior would be justified in increasing the minimum royalty rate from 12.5 percent to 18.7 percent for Powder River Basin surface-mined coal, in order to account for the climate change damage caused by methane emissions. If Interior had used this rate from 2009 through 2013, it could have earned up to an additional $1.2 billion in total revenue from Powder River Basin coal, alone. Further, Interior could provide incentives for coal operators to capture more methane emissions by negotiating royalty rate adjustments for companies with higher-than-average capture rates in a given basin.

Interior should also consider raising royalty rates even more, to account for transportation externalities. Nearly 90 percent of federally produced coal comes from strip mines in the Powder River Basin in Wyoming and Montana. Transporting this coal long distances by rail generates air pollution and additional greenhouse gas emissions, and contributes to public fatalities, congestion and noise pollution. Accounting for both methane and transportation externality costs would justify increasing the surface-mine royalty rate from 12.5 percent to 82.6 percent for Powder River Basin coal.

Because coal revenue is split nearly evenly between the federal government and the states in which production occurs, fiscal reform would have both local and national benefits. Additional revenue could help support federal and state conservation measures, infrastructure improvements, climate preparedness and education, among other public programs. Obama stated that this policy change could "put money back into those communities and put tens of thousands of Americans to work." Moreover, these policies would provide environmental and recreational benefits by creating incentives for more responsible development.

Under the current system, taxpayers cover the large social and environmental costs of coal production on federal lands. Interior is wise to pause new coal leasing and turn its attention to recouping the costs of coal production through smarter planning and fiscal reform. Doing so will better uphold its requirement to balance energy production with environmental preservation, while earning fair market value for the public.

Hein is the policy director at the Institute for Policy Integrity at New York University School of Law, where Howard is the economics director.