Illuminating the Hidden Costs of Coal: How the Interior Department Can Use Economic Tools to Modernize the Federal Coal Program

This report aims to illuminate some of the hidden costs of coal production, which Interior should account for in order to modernize the federal coal program and earn a more fair return. If Interior had used a higher royalty rate that accounts for even a fraction of the public costs of mining, it could have earned an additional $2 billion from 2009 to 2013, from coal production in four western states-Wyoming, Colorado, Montana, and Utah.

To modernize the coal program and earn a more fair return, Interior should:

• Increase royalty rates for federal coal to account for the environmental costs of coal production, which are imposed on the public. For example, Interior should increase the minimum royalty rate from 12.5 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.
• Consider increasing coal royalty rates even higher, to account for transportation externalities. Transporting 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 adding 70.1 percent to the current 12.5 percent surface-mine royalty rate for Powder River Basin coal, leading to a new rate of 82.6 percent.
• Revise its royalty rate reduction and transportation allowance regulations, to provide better incentives to coal companies. Interior should eliminate inefficient and market-distorting subsidies and royalty rate deductions, and instead use its discretion to provide incentives for coal companies to capture more pollution.
• Increase minimum bids to account for inflation, fixed external costs, and option value, or the informational value of delay. Increasing the minimum bid for coal leases will help overcome persistent problems with uncompetitive leasing and inconsistent, internal "fair market value" calculations, both of which hinder a more robust return for taxpayers.