(Bloomberg) — The Obama administration has proposed to
change how it collects royalties on coal mined from federal
land, a move that environmentalists hope, and the industry
worries, will cut use of the fuel linked to climate change.
The Interior Department says the accounting change is
needed to update rules adopted almost three decades ago, and
streamline the program for companies such as Peabody Energy
Corp. and Arch Coal Inc. And more changes are on the way.
“It’s time for an honest and open conversation about
modernizing the federal coal program,” Interior Secretary Sally Jewell said in a speech last week to the Center for Strategic
and International Studies in Washington. “How do we manage the
program in a way that is consistent with our climate-change
objectives?”
For industry, the broad effort is seen through the prism of
their ongoing complaints that President Barack Obama is waging a
“War on Coal.” Sales of federally owned coal from the Powder
River Basin in Wyoming and Montana — the biggest source —
topped 350 million tons last year, generating company revenues
of almost $5 billion, government data showed.
The Interior Department wants to assess the royalty when
mining companies sell the coal to an unaffiliated buyer, not
when sales are made to related intermediaries. Those sales have
been growing, which has raised suspicions from advocacy groups
that the prices are artificially low.
‘Sneaky, Underhanded’
“It’s a sneaky, underhanded backdoor approach to do
something through regulation that they don’t have the authority
to do,” said Richard Reavey, vice president for Cloud Peak
Energy, a Gillette, Wyoming-based company with three mines on
public lands in the Powder River Basin. “What they are saying
is: ‘We want the coal to stay in the ground and here are all the
ways we’re going to do it.’ ”
Environmental advocates are prodding Obama to halt sales of
coal from federal lands, thereby living up to his soaring
rhetoric on climate change. They say he has ignored the impact
of mining and drilling for fossil fuels on government land.
“The administration has done a lot of work on energy
efficiency and power plant emissions, but we think there should
be more of a discussion on the actual resources pulled from
federal land,” said Joshua Mantell, a government relations
representative at the Wilderness Society. “This has been a real
blind spot in terms of the climate debate.”
Asian Customers
A report by the Wilderness Society said 10 percent of U.S.
carbon emissions come from coal extracted on federal land. In
order to prevent the most catastrophic impacts of global
warming, 90 percent of U.S. coal can’t be mined and burned,
according to a paper in the journal Nature this year.
“You have to leave that coal in the ground,” said Josh
Nelson, who is running a campaign for CREDO Action that has
persuaded 70,000 people to write Interior as part of this
rulemaking to seek an end for coal leasing altogether. “If it
doesn’t stop the coal from being burned, it’s not going to
tackle the challenge of climate change.”
Powder River Basin coal is some of the cheapest to mine,
and companies like Cloud Peak are hoping to sell to customers in
China, Taiwan and other energy-hungry Asian nations. Wyoming
coal production doubled from 1990 until 2008, to more than 400
million tons. The 10 largest U.S. mines are in the Powder River
Basin, nine in Wyoming and one in neighboring Montana. Coal
accounts for nearly 40 percent of U.S. electricity generation,
the largest source.
Technical Fix
“It’s hard to find a better value for consumers or benefit
to the government than Powder River Basin coal,” Chris Curran,
a spokesman for Peabody, said in an e-mail. “It is among the
most heavily taxed coal products and provides the federal
government with substantial and appropriate levels of funding,
while fueling very low cost electricity.”
The Interior Department said its proposal is a technical
fix only. The 12.5 percent royalty is now assessed on the price
paid by whatever entity first buys the coal, such as an electric
utility or cement maker.
However, many mining companies also sell to operations they
own that clean, transport and deliver coal either to smaller
consumers or exporters. Those so-called affiliate transactions
jumped to about 40 percent of sales of Wyoming coal in 2012,
from about 5 percent a decade ago, according to government data.
Calculating Royalty
The department’s proposal would collect the royalty on the
price of the first arms-length sale, excluding some costs such
as transportation. When a mine also owns an adjacent power plant
that burns the coal, the royalty would be tied to the retail
electric price, minus all the costs along the way. The
department estimates the change won’t increase payments to the
Treasury.
Environmental advocates such as the Center for American
Progress, a Washington think tank with close ties to the Obama
administration, and CREDO back this fix, but also want the
administration to go further in overhauling the program.
“We have identified this as a key opportunity to rethink
how royalties are collected on coal,” said Nidhi Thakar, deputy
director of the public lands project at the Center for American
Progress. “It’s very clear that the Department of Interior is
thinking very hard about this issue.”
Complex Process
Reavey, of Cloud Peak, said the Interior Department is
combating a problem that doesn’t exist. Companies now calculate
the appropriate royalty by comparing sales to affiliates to
those of similar arms-length transactions. And figuring out how
to subtract costs from sales well down the line will just muddy
the program further, he said.
The change may create the biggest impact on exports, which
had been expanding for Powder River Basin coal. Those shipments
have slowed as prices slump and demand weakens in Asia. Shutting
the export market is a key push by climate activists, who are
seeking to block new West Coast ports that would ship to Asia.
“There is going to be a market for Powder River Basin coal
exports, and this makes for an uncertain operating
environment,” Reavey said. “This absolutely does not
streamline the administrative process.”
The royalty change may be the first of many for the U.S.
leasing program. The Center for American Progress has urged
higher royalty rates and reworking the process to avoid single-bidder sales. It also proposed adding the costs to society of
carbon emissions into the fees paid by mining companies to
extract coal.
Former Interior Department deputy secretary David Hayes,
nominated by Obama in 2009, endorsed that proposal Tuesday in a
New York Times opinion article. And that approach got an
unexpected boost from Jewell in her speech last week.
“We need to ask ourselves: Are taxpayers and local
communities getting a fair return from these resources?” Jewell
said. “How can we make the program more transparent and more
competitive?”
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Mark Drajem in Washington at
To contact the editors responsible for this story:
Jon Morgan at
Steve Geimann