coal

Jobs matter.  For the job holder, this is obvious:  the wages support them and their family.  But jobs also matter to the country overall, as economic strength forms the basis for a strong foundation of political stability, prosperity, and growth.  Community relationships can turn ugly if lots of people are thrown out of work, purchasing power evaporates, and a downward economic spiral begins.  But preventing this spiral is more about protecting the golden goose than it is about trying to protect any one of the goose's golden eggs.

Sound management of the country needs to create a business environment and stable political environment that allows capital to flow to good ideas; rule of law to protect patents and property rights; and an opportunity for firms to grow and prosper within the United States.  This is not the same thing as preventing job loss.  Indeed, job losses are sometimes necessary in order to redeploy labor from declining sectors to new ones.  If shedding workers is too hard, firms won't be willing to take the risk of hiring new ones, driving up baseline unemployment.  Just ask France.  The best policies for job creation and retention should focus generally on labor market conditions and transitional assistance; not on hard-wiring protectionism for this industry or that. 

Admittedly, this broader focus can be a big shift for people coming into government from upper management positions in private firms.  In their old jobs, they had the luxury of focusing only on a small piece of the economy:  how does policy A, B, or C affect my bottom line or my firm?  In contrast, public sector concerns span the entire labor market.  It's a much tougher balancing act since policies that boost one firm or prop up particular employees quite often do so at the expense of others.

Though environmental regulations get blamed, coal jobs have been under pressure for decades, from many factors

Coal has been under pressure for decades (see Figure 1).  The chart below shows coal jobs in West Virginia peaking before 1950.  While environmental controls were greatly needed in this industry, it is clear that they were not a factor in the early declines in employment shown; and that they have been part of a constellation of pressures in the years since.  

To be clear, worker and mine safety;  wide ranging air emissions of concern;  proper management of coal waste; and stabilization and reclamation of old mines have all been issues the industry should have addressed proactively and willingly as a core part of their business practices.  Unfortunately, compliance on these issues both in the US and in many other countries as well, has tended not to be voluntary but rather the result of accidents, litigation, regulation, and other pressure.     

But while the industry frequently blames environmental regulations for the competitive troubles it faces, there's lots more going on.  A shift to mechanized mining has been continuous, reducing the labor intensity of each ton of coal produced (see Figure 2).  Productivity in Eastern mines more than tripled between 1949 and 2015; but in comparison to the mechanization of massive Western strip mines, the labor productivity at Eastern mines remains low.  

The closure of integrated steel mills in the US has been another factor, cutting coal demand in states such as WV.  In recent years, falling natural gas prices have been the largest pressure, encouraging the retirement of old coal plants and their replacement with natural gas facilities.  In addition to cost, natural gas burns cleaner, is easier to move long distances (pipelines rather than rail), and has much lower long-term market risk should carbon pricing again enter the policy arena.  As presidential terms last only four years, and as international focus on reducing greenhouse gases remains strong, most large companies do anticipate carbon pricing will remain important in their planning.  Change is the norm; how well each individual state diversified its economy is a central question not only for coal, but for pretty much all commodity-based industries.  Predictable though boom-bust cycles for commodities and single-industry states may be, too many have not adequately diversified.  Concluding that their lack of diversification means we should stop cutting pollution from coal production, however, is exceedingly short-sighted.

Figure 1.

Source of graphic: West Virginia Center on Budget and Policy, 2013

Figure 2. Labor productivity in coal mining, 1949-2015

Source of graphic:  Charles Kolstad, Standford Institute for Economic Policy Research, March 2017
 

Scott Pruitt, coal job magician 

Federal policy on jobs is supposed to be industry neutral.  This is long-term efficient:  we want to shift to new industries, phase out of sectors that are no longer competitive, and provide unemployment support and job training for all unemployed individuals regardless of industrial sector. 

This is not the approach followed by the Trump administration, and certainly not by EPA Administrator Scott Pruitt who seems to relish the rollback of environmental controls.  Trump has promised to restart coal country, restoring jobs lost long ago, and is using the elimination of environmental regulations as his lever. 

According to Pruitt, they've already been remarkably successful.  He noted on June 4th that "we've added almost 50,000 jobs in the coal sector" since October 2016.  In actuality, the US Bureau of Labor Statistics reported there were only 51,000 jobs in total in the sector as of May 2017, making Pruitt's claim a home run if true.  It's not.  Turns out, his figure is for all mining, of which 75% was associated with oil and gas.  For coal mining alone, the BLS data shows a decline since April 2016, and an increase of only about 1,000 since the Trump administration took office in January 2017.

Coal isn't the only sector shedding jobs

While it is irritating that Pruitt spouts false statistics to justify short-sighted policies, it is the underlying policy miss that is most important.  A lost job is still a lost job, even if it happens in less visible or less iconic sectors.  And it turns out that some of those more mundane losses greatly exceed labor reductions in the coal sector. 

Take retailing:  just as natural gas is displacing coal-fired power plants throwing miners out of work, so too is the shift to online retail triggering a bloodbath in brick-and-mortar retail employment:

Overall retail employment has fallen every month this year.  Department stores, including Macy's and JC Penney, have shed nearly 100,000 jobs since October -- more than the total number of coal miners or steel workers currently employed in the U.S... [D]epartment stores have lost 18 times more workers than coal mining since 2001.

Pick any decade since the start of the United States.  Pick any region of the country and map out what jobs its people have held over time.  The common pattern one will see not a pattern at all; it is continual flux, evolution, and change.  Those changes inevitability include job loss -- followed by some mix of retraining, redeployment, and migration to other parts of the country for work.  A portion of these workers will not be so resilient, but instead face long-term unemployment and with it, economic deprivation for themselves and their families.  These people may include coal miners; but they will also include people who worked in retail or any other sector in decline.  And the role of public policy should be to alleviate suffering and to expedite transitions to new jobs for this last group of people.  It is not, and should not be, to hold labor markets frozen in time.  When even Charles Murray, the founder and CEO of Murray Energy, the largest privately held coal mining company, says that the coal mining jobs aren't likely to come back, it's time to focus on job creation more broadly.

It turns out that if the US takes its commitments under the Paris climate agreement seriously -- the ones where we pledge to limit global warming to well below 2 degrees centigrade so as not to fry the planet -- there is too much coal. 

Standard markets rationalize capacity based on price signals.  If folks overbuild and prices collapse, shareholders may suffer but the general public doesn't care much. 

With fossil fuels, the dynamics are not the same.  Because the ghg aspect of production is not integrated into prices much at all yet, overbuilding on the basis only of projected coal prices can cause some big problems for the rest of us.  Both coal mining and coal burning infrastructure are capital-intensive and long-lived.  Creating excess capacity now can lock us in to far too much ghg emissions for decades.  Thus, it is useful to assess alternative mechanisms for constraining supply.

This paper, produced together with the Carbon Tracker Initiative and Energy Transition Advisors, looked specifically at existing federal coal leases within the Powder River Basin (PRB) of the United States.  The PRB coal comprises almost all of the federal coal being produced today and a large portion of coal from all sources within the United States. 

There is already a moratorium on new federal leases within the PRB, but it is temporary.  We evaluated whether making the moratorium permanent would be feasible without triggering large scale market dislocations.  Turns out, existing leases are adequate to supply the needed coal through 2040 in the 2 degree scenario.  The logic for making the moratorium permanent is strong.

Key Findings

• Reserves at existing mine leases are more than sufficient to meet 2°C demand through the IEA 450 scenario timeframe of 2040.
• The Bureau of Land Management does not need to issue any new leases to meet demand in the review period.
• Some production from existing mines will be surplus to requirements. Closure and reclamation of existing operations will need to be fully funded by the operators.
• Comparison with the (non­‐2°C compliant) EIA AEO Reference case implies that new leases will enter meaningful production in 2031 under a BAU scenario.
• We therefore recommend that, to be consistent with the Administration’s aspirations at COP 21, the current short-­‐term moratorium on new leases within the PRB be extended indefinitely.
• A review of other studies shows that PRB specific policies will result in net savings to CO2 emissions despite some substitution with fossil fuels from other sources.

The full paper can be accessed here.

UPDATE, August 10, 2016:  Nice coverage of this study by Dave Roberts in Vox.

Just last week, the Economist magazine noted in an editorial that:

However you measure the full cost of a gallon of gas, pollution and all, Americans are nowhere close to paying it. Indeed, their whole energy industry—from subsidies for corn ethanol to limited liability for nuclear power—is a slick of preferences and restrictions, without peer. The tinkering that will follow this spill will merely further complicate it.

As if on cue, out comes "The American Power Act."  For some reason, idle hands in Congress always find particular comfort in working on energy bills, and an early summary of the latest of a long line of government energy initiatives has just been released.  A short summary of that summary can be accessed here.  The American Power Act will dole out all sorts of goodies, with some huge potential gains to coal and nuclear power.

Before going into what the bill contains in giveaways, it is useful to note some of the key things it does not do.  It does not remove the government from the role of choosing technology winners and losers, and it does not build a neutral policy platform on which all energy technologies must compete for whatever public support is offered.  In fact, the bill summary views this not as a bug, but as a feature, noting that the bill is "investing in innovation across all energy sources."  Investing in everything is not a very good theory of change, as I've examined in detail previously.  Finally, it does not work to quickly establish greenhouse gas price signals for key energy and industrial sectors, but rather seeks to shelter them from these prices for many years.

In terms of the new subsidies in the bill, in depth analysis requires the specific legislative language.  However, some choice nuggets are already evident in the summary:

Nuclear

• 5 year depreciation on nuclear reactors expected to last 60 years.
• Formally increases Title 17 loan guarantees to nuclear by $36 billion, to $54 billion (there is an additional $2-4 billion above this total that is already in place for front-end facilities such as enrichment).
• Introduction of a "loan guarantee retention fee" on nuclear loan guarantees, supposedly to expedite repayment of the guarantees.  (The language here is strikingly weak:  "to ensure that money is returned to the program as expeditiously as practicable").  The actual form and meaning of these fees is not clear from the summary however.  It could be a withholding from the loan guarantee amount (in which case firms will overstate need to create a buffer).  Also not clear is how the retention fee will interact with the credit subsidy payments already required.
• A tripling of the coverage for nuclear delay insurance, from $2 billion to $6 billion in face value; covering 12 rather than 6 reactors.
• Accelerated licensing and review procedures for new reactors, and elimination of some review steps.  How these complex projects can be properly overseen with the expedited process remains to be seen.
• Increased research push on small reactors and fuel reprocessing.
• Since production tax credits can only be earned once a plant begins operation, the bill adds a 10% investment tax credit that can be captured earlier, and likely even if the plant is never completed.  A 10% federal grant would be available to non-taxable entities involved with reactor construction, as such entities can't use tax credits.  Detailed legislative language is needed to see whether these can be combined with other subsidies, such as production tax credits, or much be used instead of them.
• Allows nuclear to access Advanced Energy Project Credits, providing up to a 30 percent tax credit for manufacturing eligible project components (credits may be carried forward up to 20 years).  The credits have a national cap, so look for subsequent legislation to dramatically increase the available support.  The current cap of $2.3 billion is rounding error in nuclear projects, and remains low even after the APA's  additional $5 billion (Section 4003) in credits is included. 
• Expanded use of tax-exempt private activity bonds in the nuclear power sector.  Because nuclear projects are so big, this provision may not be popular with other users of private activity bonds.  Usage of Build American Bonds (BABs), another tax-advantaged financing tool, by the Vogtle reactors is among the largest BAB projects in the country.
• Allows existing production tax credit (PTCs) for nuclear to be entirely allocated to private participants on a project that includes both taxable and non-taxable entities.  This will increase the effective value of existing nuclear PTCs.
• Extends suspension of import duties on imported nuclear components.  Although nuclear is touted as a solution to energy security concerns, many of the most expensive reactor elements are manufactured outside of the United States.

Coal

• The bill provides some additional subsidies to advanced coal and carbon capture and storage.  However, the most valuable subsidies to the coal sector will likely come through the grants of emissions credits.  The impact of these schemes is difficult to gauge without more detailed language, but Section 1431 of the bill does indicate that where plants or utilities capture and store carbon, they will actually earn GHG allowances.  Under a strict cap and trade, such facilities would simply avoid the need to buy credits by reducing emissions. 
• Section 798 appears to buy off up to 35 GW of premature closure of merchant coal plants by allowing them to continue to receive emissions permits even if the plant has been closed or repowered.  There is no detail suggesting that the buyouts will go first to the dirtiest plants (whether merchant or not), or require high levels of operations in order to be eligible.  The risk of this subsidy being gamed seems high.

Clean Energy Funding

• Section 1801 establishes a "Clean Energy Technology Fund" to promote development of new energy technologies, though provides little additional details on eligibility, structure, or funding levels.  One concern is that the wording sounds like this could be an effort to implement some type of clean energy bank, along the lines of poorly structured earlier proposals for a Clean Energy Deployment Administration (critiqued here). 

Credit Offsets and Allocations

• Title II of the bill attempts to establish some centralized vetting of offset claims, both domestically and internationally, to ensure that offsets are awarded for behaviors that actually reduce emissions.  This is a useful element of the bill, though likely extremely difficult to do well.
• As with other climate bills, this one contains broad giveaways of carbon credits for a sizeable period at the inception of the new law.  As explained by Joe Romm, the bill also attempts to deal with credit price volatility through gradually increasing floors and caps.
• Title IV provides widespread rebates and allowances to industrial emitters of GHGs, suggesting that key industrial sectors will see little price incentive to curb emissions.

"Fast" Mitigation of Hydrofluorocarbons

• Though "extremely potent greenhouse gases," HFCs are to be reduced to 15 percent of baseline, but not for another 22 years.  Hard to imagine what "slow" mitigation looks like.

Oil and Gas

• Section 1204 allows state opt-out of oil and gas drilling within 75 miles of its coastline (otherwise federal laws pre-empt state wishes).  While this provision was introduced in response to the recent Gulf oil spill, its actual protection of coastal resources may be more symbolic than real.  As of May 11th, the Gulf spill oil slick was 130 miles long and 70 miles wide -- enough to have blown through the proposed buffer zone.
• Provides substantial subsidies to convert vehicles to natural gas (starting section 4121).  This is another example of government micro-managing technology selection.  The transport policies should be neutral with respect to any option (better engines, hybrids, electric vehicles, improved fleet management) that reduces oil demand.

Update:  The full bill, in all 987 pages of glory, has now been released.  It will obviously take some time to go through.

Starting a conversation about leakage immediately makes people uncomfortable.  Their gaze shifts to floor, and it is clear they are hoping the speaker will have the good sense to avoid the rather uncomfortable topic addressed by the smiling actors in a Depends undergarments commercial. 

Rest assured: your averted eyes have been noticed.  But leakage in the world of environmentally-harmful subsidies and climate change is hardly a happier exchange.  At least with Depends there is a recognition, albeit an awkward one, that the problem is an unhappy fact of the human condition. 

Not so the with the second category.  Policy makers continue to be surprised (shocked, absolutely shocked) when affected parties game the politicians' carefully worded statutes to the great detriment of the environment and the public purse.

Such willful blindess is unjustified given that examples of policy leakage are everywhere.  International lenders want to direct funds to clean energy, yet it turns out that 400 million British pounds that the UK has given to the World Bank is financing coal plants instead.  Or that the billions of dollars in the US cash for clunkers program bought almost no increased efficiency in the auto fleet, instead often swapping one inefficient vehicle for a newer inefficient vehicle - though perhaps in a cooler color.   Or that the landfills that are going to be able to sell carbon offsets for methane capture may actually be leaking a big share of the methane they produce into the atmosphere entirely free of cap and trade constraints.  Or -- and here's a surprise -- when you are paying people for what they aren't doing (but could), they exagerate what they would have done in the absence of the payment in order to get more money. 

Policies may leak because they are built that way to provide goodies to targeted constituents in a less public (and politically less-costly) way.  They may leak because they are too complex or naively structured.  Even well-intentioned policies may contain just enough vagueness in their wording for enterprising lawyers and trade associations to rip them open in the back-alleys of the policy world (such as tax courts, rulemakings, or conference committees), in the process extending subsidy support to entirely new classes of activities. 

An arcane private letter ruling by the US Internal Revenue Service, for example, defined a portion of an ethanol production facility as a solid waste plant, opening the door to tax-exempt bonds in the hundreds of millions of dollars for nearly every plant that followed.  The logic of the ruling -- that mid-process byproducts of complex production facilities had negative market value, and therefore met solid waste definitions -- was rather silly and would seem to apply to nearly all complex industrial processes.

A creative reinterpretation of paper industry recovery boiler operations to include a bit of diesel fuel will cost the US federal government an estimated $8 billion per year, despite the fact that the industry has been recovering energy from its "black liquor" waste products for decades.  There have been other similar schemes:  "splash-and-dash" for biodiesel, and "spray-and-pray" for coal.  Too often, it is the lowly taxpayer left doing the real praying.

In many cases, it is impossible to tell whether the loopholes that ultimately cost us so dearly were mere accidents of drafting, or whether the vagueness was intentional, inserted by forward-thinking lobbyists and their like-minded Congressional allies.  In some cases, the loopholes get closed once enough sunlight shines on the cost.  In some closure happens very slowly, or not at all.  The US Mining Law of 1872 has been giving away publicly-owned hard rock minerals for a very long time, with reform continually held at bay.

These headlines are more likely the exceptions than the rule.  In fact, in the absence of any systematic reporting on subsidy disbursements or receipts, it would be would be foolish to assume that the programs that have been flagged by our media or public policy groups comprise any mroe than a small fraction of the schemes, redirection, and inefficiency that is actually present.  The definition of "solid waste" (paragraph 297) on which tax credits can be earned in the US, for example, includes nearly every possible residential, commercial, and industrial waste stream other domestic wastewater and radioactive wastes.  We live in a bizzarro world with ever larger subsidies to burn and landfill wastes, undermining the inherent economic benefits of recycling in terms of recapturing invested energy and materials processing.  We are entering a world with increasingly complex policies being applied globally, and where the risks of damage from these types of problems are ever larger.

Why does all this matter?  Because the crafters of today's climate plans are acting as though their new bills, filled with hundreds of pages of handouts, will somehow avoid the frequent and expensive failings of the past.  They are focusing on cutting deals and not on building a policy structure that will provide real transparency and accountability. 

For Senators John Kerry and Lindsey Graham, the handouts are not a bug in the program, they are the feature attraction.  They noted in a recent New York Times op-ed that

killing a Senate bill is not success; indeed, given the threat of agency regulation, those who have been content to make the legislative process grind to a halt would later come running to Congress in a panic to secure the kinds of incentives and investments we can pass today.  Industry needs the certainty that comes with Congressional action.

The "agency" in question is the US Environmental Protection Agency that they say will botch things up by imposing regulations that

are likely to be tougher and and they certaintly will not include the job protections and investment incentives we are proposing.

It is not clear why the US EPA will screw things up any worse than politically driven allocations of hundreds of billions of dollars in carbon credits, and terms and compliance schedules that may do little to address the core purpose of the bill in constraining greenhouse gas emissions.  Yes, we need to constrain emissions.  But is this really the best the country can do?  Might a carbon tax, levied on base fuels, be subject to much less gaming and inefficiency?  What about a full auction of credits, rather than political allocations?  Or much smaller allocations and a shift from offset sales to emission regulation from land-use based sources of GHGs such as landfills and agriculture?  Or much more rapid expiration of allocated credits so firms need to go to market quickly for at least a portion of their allocation? 

Can Kerry and Graham at least be honest about the level of leakage they are creating in their effort rather than pretending they have the "blueprint for a clean-energy future that will revitalize our economy, protect current jobs and create new ones, safeguard our national security and reduce pollution"?

While subsidies to fossil fuels are thankfully getting increasing attention, even at the level of the G20 (see paragraphs 24-26 of the link), subsidies to a variety of environmentally harmful activities are pervasive at lower levels of government as well.  An Earth Track review of state-level subsidies to biofuels in the United States, for example, found roughly 200 state and local programs supporting ethanol and biodiesel.  These programs existed in nearly every state of the country.  The Database of State Incentives for Renewables and Efficiency (DSIRE), run by the North Carolina Solar Center at North Carolina State University, identifies over 2,000 programs supporting renewable energy and energy efficiency alone. 

More systematic assessments of sub-national subsidies, and how they affect natural resource use, are not very common.  A useful review of state-level energy tax subsidies was done by Joe Loper of the Alliance to Save Energy more than 15 years ago; I've not seen a more recent treatment of the topic in the US.  Evaluations of specific sectors in specific states are also infrequent, though less so.  A recent study done by Melissa Fry Conty and Jason Bailey at the Mountain Association for Community Economic Development, for example, does a good job examining coal subsidies in the US state of Kentucky.  The analysis is striking in two respects:  it illustrates how complex the state-level subsidies are; and it demonstrates that even after one credits the coal sector for direct revenues and those associated with jobs created indirectly from coal industry multipliers, the subsidies still exceed the revenues.  

The norm in resource subsidy assessments is to focus on national policy, dismissing the messy world of sub-national subsidies as de minimis.  DSIRE, for example, does not monitor subsidies to conventional fuels at all, though many US states also offer them.  In site operators do not attempt to quantify the subsidy cost of the programs they do track.  The data problem is compounded by the fact that many states do a poor job tracking subsidies themselves.  State-level reporting of tax expenditures, for example, is more the exception than the norm. 

The Conty and Bailey study of Kentucky coal subsidies is a useful reminder to resist this urge and instead to identify solutions that can improve transparency at multiple levels of government at once.  There are multiple reasons to do this. 

First, many state and local subsidies are not very effective.  They attempt to influence economic activity to migrate from one subidized geographic region to another, creating a "race-to-the-bottom" bidding war that may generate little net new economic activity; or only at great cost.  Good Jobs First, a Washington, DC-based organization has been tracking these economic bidding wars for nearly two decades, with many examples of their poor efficiency.  

Second, although state and local subsidies often are smaller than those on offer from the federal government, this doesn't mean they are actually small.  Consider the Texas Economic Development Act, cleverly structured to allow local governments to offer tax breaks to specific businesses that they don't have to pay for -- the program ultimately shifts the financial burden to the state.  A recent audit of subsidies from this program by the Texas Comptroller General (see p. 4) found energy to be the largest beneficiary sector, capturing nearly 60 percent of total subsidies granted to date.  The audit found total gross tax benefits of $713 million to renewable energy (for 61 projects), and additional $501 million in subsidies for two planned nuclear reactors.