Shake-Up for the Federal Coal-Leasing Program

It’s a smoggy new day for the fossil fuel industry. Right before President Trump and his Cabinet of Horrors swept in to prop up the country’s dirty energy market, their predecessors at the U.S. Department of the Interior took a hard look at the federal coal-leasing program run by the Bureau of Land Management. The reforms they suggest—announced during President Obama’s final days in office—kick off a comprehensive public review of the program. The evaluation began under former Interior secretary Sally Jewell, who imposed a moratorium on new coal leases last year. Her concerns were economic waste and environmental damage, and they echoed the sentiments of more than 100,000 public comments submitted prior to the review.

With 40 percent of U.S. coal mined from federally owned land—generating $8 billion in lease payments annually—the DOI’s suggested reforms would bring significant change. But as with many other environmental mandates he’s inherited, Trump could reject them with the stroke of a pen. While we wait and see, here’s what you should know about the program and the proposed changes—and why you should rest assured that this report does matter, whatever the president decides.

How does the federal coal-leasing program work?

Coal companies request the right to mine specific parcels of federal coal. Before the government can approve the request, the public has an opportunity to object before the BLM holds an auction.

Each lease involves three sources of federal revenue. The winning bidder pays a per acre lease fee, a flat amount per ton of coal extracted, and a royalty, which is a percentage of the sale price of the coal. The revenue is shared by the federal government and the state where the land is located.

What’s wrong with the current program?

First, the leasing program damages the climate. Coal from federal lands accounts for more than 10 percent of all energy-related greenhouse gas emissions in the United States.

The program is in direct contradiction to our national policy. The Supreme Court has ordered the federal government to consider carbon dioxide as a pollutant, and the administration agreed at the 2015 Paris climate conference to help keep the global average temperature increase below two degrees Celsius. Selling huge amounts of coal, the dirtiest source of utility-scale energy, is both counterproductive and hypocritical.

Second, it’s too cheap. Taxpayers don’t receive fair market value for the coal, with many auctions involving only one bidder. Last month, for example, the BLM sold 56 million tons of coal for approximately 41 cents per ton—just 1 percent of the market price of $41 per ton—in a single-bidder auction. At a time of extreme political polarization, it’s important to note that this issue draws bipartisan concern. The latest coal sale was approved by the DOI under President Obama—which also approved the largest coal-lease sale in history back in 2012.

The royalty rate is more hortatory than obligatory. It’s officially 12.5 percent of the sell-on price, but the effective rate is below 5 percent on average. Deductions, such as transportation costs, help lower the rate the mining company is asked to pay. And more significantly, an accounting loophole allows the companies to sell the coal to an affiliate at a depressed price, instead of selling it in an arm’s-length transaction. Over the past 30 years, these undervalued sales have cost taxpayers more than $30 billion, according to analysts.

What has the Bureau of Land Management proposed?

The report contains many proposals in a mix-and-match format. One could spend a long weekend reading through them all, so let’s focus on a few that relate directly to environmental and fair market value issues.

The Bureau proposes to increase the royalty rate. The magnitude of the increase is uncertain, and the report contains a truly staggering range of possibilities, as high as 304 percent. The rate increase would be coupled with reforms to increase transparency and close loopholes.

Another proposal is to institute a carbon adder to account for environmental damage. As with the royalty rate, the BLM didn’t commit to a figure but bandied about $20 per ton as an option. This would be the equivalent of raising the royalty rate from 12.5 percent to approximately 200 percent—no small change. (For context, note that that the royalty rate for offshore oil and gas extraction is 18.75 percent.)

It’s not clear that the revenue raised from the carbon adder would go toward climate mitigation or adaptation, so the BLM offered another option, which it calls compensatory mitigation. These funds would be used to purchase carbon offsets or invest in carbon sequestration technology.

The BLM’s most aggressive proposal is to make the moratorium permanent, forever ending further large-scale federal coal leasing.

“If we want to stay under 450 parts per million of carbon in our atmosphere, then we must stop selling new federal coal,” says NRDC senior advocate Theo Spencer, who adds that this is one of many actions needed to promote clean energy. “There’s already enough leased coal to move us past that threshold under a business-as-usual scenario.”

How would the reforms impact climate change?

Neither a royalty rate increase nor a carbon adder would likely make a major impact on greenhouse gas emissions. A modest increase in the price of coal from federal leases won’t reduce demand for electricity in any measureable way. In part, that’s because people and businesses rarely base their electricity consumption on minor changes in the price of power. (Rather, our energy use hinges on the implementation of policies that make our homes and appliances more efficient.)

Still, if the federal government is going to keep selling coal, it makes good economic sense to raise the royalty rate. In its present state, the coal-leasing program is little more than a giveaway to fuel companies.

For more effective action on climate change, we’ll need a hard ceiling on coal production from federal lands, either a carbon cap or a total ban on new leasing, among other efforts to decarbonize our electricity systems. Though it’s likely that some mining companies would switch their focus to private or state-owned land, many would find this transition to be cost-prohibitive. A company that’s set up to mine and transport coal from Wyoming’s Powder River Basin can’t simply pick up and move to the Illinois Basin. The equipment is expensive and enormous—coal strippers can be 16 stories high and cost tens of millions of dollars. The transportation infrastructure takes years to develop. And the power plants where coal is combusted are designed to burn coal from specific regions.

A 2016 report estimated that for every five tons of federal coal taken out of production, as little as one ton would be produced elsewhere to replace it. Increases in natural gas production and renewable energy, as well as improvements in energy efficiency, would make up most of the difference.

Would the BLM reforms hurt coal miners?

Not measurably. The coal industry appears to be dying a natural death. Coal’s share of U.S. energy production has been falling fairly steadily for 30 years, despite the subsidy the federal coal leasing program has offered.

Coal has also lost its price advantage over competing energy sources, and increases in the price of federal coal can’t significantly affect this reality.

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