Reconsidering coal’s fair market value

As the Obama administration makes strides to reduce downstream greenhouse gas emissions from coal-fired power plants, the Department of the Interior should also take steps to account for the upstream costs of coal mining on federal lands. In doing so, Interior can address the concerns of two disparate interest groups at once: fiscal reform advocates who demand a “fair share” for energy production on taxpayer-owned lands, and environmentalists who seek to lessen the negative externalities associated with coal mining.

{mosads}Led by Secretary Sally Jewell, in 2015 the Department of the Interior called for an “honest and open conversation about modernizing the federal coal program.” This is a welcome first step. There are concrete actions that Interior should take to close corporate loopholes, update outdated fiscal terms, and account for social and environmental costs and option values, in order to earn a fair share for taxpayers and address coal’s environmental impacts.

Coal mining on federal lands accounts for more than 40 percent of all coal produced in the United States. Nearly 90 percent of federally produced coal comes from strip mines in the Powder River Basin in Wyoming and Montana. Coal mines in the United States produce about 1 billion tons of coal every year; approximately 10 percent of that coal is exported, where it often sells at significantly higher prices.

The federal coal leasing program is not structured to ensure that taxpayers receive “fair market value,” as the law requires. Recent investigations have shown that coal companies exploit fiscal loopholes, costing taxpayers up to $1 billion each year in lost revenue. Outdated policies fail to remedy uncompetitive bidding practices: 90 percent of all federal coal lease sales since 1990 had only one bidder. The Government Accountability Office found that Interior’s Bureau of Land Management (BLM), which manages the coal program, did not properly account for coal’s export value when conducting internal appraisals. And Interior’s Office of the Inspector General reported that BLM lost more than $60 million in undervalued, noncompetitive lease modifications since 2000. Furthermore, royalty rate reductions are granted for more than one-third of all leases (often to encourage greater production), making the effective rate much lower than the statutory minimum.

Interior’s fiscal terms also fail to account for environmental externalities that impose uncompensated costs on the public. Large amounts of fossil fuels are required to extract and transport coal, and fugitive methane emissions escape from surface and underground coal mines. Resulting externalities include methane and particulate matter emissions, water pollution (such as from acid mine drainage), habitat disruption and carbon dioxide emissions from heavy equipment and the transport of coal over long distances in diesel-powered trains. Many of these externalities are not fully addressed by current regulations. For example, because no federal regulations address methane emissions from coal mining, companies do not currently have an incentive to capture all of the methane that is socially optimal. Each of these externalities impose a social cost. Raising the royalty rate to recoup these costs — such as through a regional royalty rate increase based on the average cost of externalities for a region — would be a rational reform. After instituting this change, BLM could then negotiate lower rates for companies that pollute less than the regional average.

A recent report by the Institute for Policy of Integrity at the New York University School of Law highlights reforms that should be made to both earn a fair return for taxpayers and reduce the social costs of mining on federal lands. In addition to adjusting the royalty rate, the report notes that Interior should end the practice of granting royalty rate reductions and providing uncapped transportation allowances to coal companies, which amount to a subsidy for coal production. In addition, BLM’s coal appraisals should account for the export value and the option value, or informational value of delay, of coal leasing.

A robust definition of “fair market value” should include both the market price of the coal resource and the social cost of mining — the cost to American taxpayers of mining on public lands due to environmental and social externalities. This definition would better advance Interior’s dual mandate to earn a fair return on development of energy resources and to preserve and protect the environment.

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