The U.S. Department of Interior halted new coal leases on federal lands earlier this year pending a review of the outdated leasing program.

In a new article in Science, a group of leading economists and energy experts highlight features in the leasing program that are ripe for reform, including an auction process and royalty rates that simply don’t reflect the social costs of coal.

These facets of the program mean low-cost federal coal is putting downward pressure on coal prices nationwide and taxpayers are not getting a fair return on coal royalties.

“Reforming the program would prevent taxpayers from getting an unfair deal and help to level the energy playing field,” said Michael Greenstone, an author of the article and the director of the Energy Policy Institute at the University of Chicago.

While the fate of any reform efforts are unknown as the Trump administration is just being put together, the challenges presented by these policies are not going away any time soon, said co-author Kenneth Gillingham, an associate professor of economics at the Yale School of Forestry & Environmental Studies.

“There is more than enough evidence now to warrant a very serious review and reform of the federal coal leasing program,” said Professor Gillingham. “It’s very clear that the social costs of coal, in particular, are not incorporated in any meaningful way in how the royalties are administered. This is a jarring disconnect for a government that in general tries to incorporate social costs, particularly of climate change, in policy discussions.

In addition to incorporating those social costs, the authors make the case that more research is needed to better understand how policy changes might impact the potential shift to nonfederal coal and other energy resources if royalty rates are increased, a lack of competition in federal coal leasing auctions, and incentives inherent within the current leasing program.

About 40 percent of all coal mined in the U.S. is extracted from lands owned by the federal government under leases managed by the DOI. The burning of that coal accounts for about 13 percent of U.S. energy-related greenhouse gas emissions.

More than 80 percent of federal coal comes from the U.S. West. Coal extracted from the Powder River Basin, located in Wyoming and Montana, fetches about $0.51 per one million British thermal units (MMBtu) before transportation. By comparison, other major private coal-producing basins in the U.S. range from $1.41 to $1.80 per MMBtu. Coal from the Powder River Basin produces climate damages of $4 per MMBtu—six times the average spot price of the coal.

In addition, the current leasing program promotes very little competition. From 1990 to 2012 more than 90 percent of leases had a single bidder. Yet despite this and other shortcomings, the authors write, there has been little research on finding new solutions. In the case of the auction system, for instance, there could be more research into regional leasing models that would encourage competition.

Finally, some of these same issues apply to federal gas and oil leasing and the article calls for more research into reform opportunities in these areas.

 

By Kevin Dennehy, Yale University, with modifications. 

Areas of Focus: Energy Markets
Definition
Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Fossil Fuels
Definition
Fossil Fuels
Under current policies, fossil fuels will play an important role in the energy system for the foreseeable future. EPIC research is exploring the costs and benefits of these fuels as...
Climate Change
Definition
Climate Change
Climate change is an urgent global challenge. EPIC research is helping to assess its impacts, quantify its costs, and identify an efficient set of policies to reduce emissions and adapt...
Climate Economics
Definition
Climate Economics
Climate change will affect every sector of the economy, both locally and globally. EPIC research is quantifying these effects to help guide policymakers, businesses, and individuals working to mitigate and...
Climate Law & Policy
Definition
Climate Law & Policy
As countries around the world implement policies to confront climate change, EPIC research is calculating which policies will have the most impact for the least cost.
Definition
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.