Monday's unveiling of the Obama administration's proposal to cut carbon emissions triggered a withering response from politicians and business groups tied to the coal industry—the most vocal of them proclaiming Obama's "war on coal" would decimate jobs and companies, create the next energy crisis and devastate the U.S. economy.
Wall Street must have missed the memo.
On the day the proposal was released, the Dow Jones Industrial Average and the Standard & Poor's 500—the stock indexes most closely associated with the nation's economic health—rose. Results in the coal sector were mixed. The stock price of the nation's largest coal producer, Peabody Energy Corp., closed down 15 cents, or 1 percent. Natural Resource Partners, Cloud Peak Energy Inc. and Walter Energy Inc. also saw their stocks fall on Monday, while shares of Alliance Resource Partners, Westmoreland Coal Co., and Rhino Resource Partners moved higher.
By the time U.S. stock exchanges closed on Thursday, the Dow and the S&P 500 had settled at new record highs. Traders had largely shrugged off dire warnings about the carbon-cutting plan and sent the share prices of Peabody Energy and three other coal companies above where they started on Monday morning.
"The market reaction I thought was a little bit tepid, particularly on [Monday]," said a power sector analyst who did not want to be named because his Wall Street employer discourages media interviews.
The long-awaited proposed rule from the Environmental Protection Agency is meant to significantly reduce harmful carbon dioxide pollution from U.S. power plants. It lays out a framework for achieving, by 2030, a 30 percent cut in emissions compared to the amounts released by fossil fuel power plants in 2005.
Critics and others have long assumed that the rules would force the closure of coal-fired power plants, the dirtiest of the U.S. power generation fleet. Under the rule, however, each state can achieve its emission reduction goal through a combination of switching to natural gas plants, adding renewable power sources, making coal plants more efficient, lowering overall power consumption, instituting carbon fees, a carbon trading system or other methods.
One reason for the less dramatic market reaction is that the EPA goal is not as aggressive as some critics feared. In addition, the selection of the 2005 benchmark allows states to get credit for years of emission cuts—and that factor alone could put the nation as much as halfway to the 30 percent target.
There are other reasons, too.
+ Fear over the impact of the rules started to build well before the EPA released the report. Some company stocks had already taken a hit in anticipation of Monday's announcement, so share movements after the plan’s release could reflect only part of the market’s reaction. The increases in some stock prices could reflect a measure of relief that the impact may not be as damaging as expected.
+ It's complicated. And it's 645 pages long, not counting all the back-up documentation. "I think it's taking all of us a little bit of time to really digest how it's going to play out over time," said Kevin Kennedy, director of the World Resources Institute's U.S. Climate Initiative.
+ It's just a proposal, and it will change. There is a 120-day comment period, which will draw in feedback from states, industries, interest groups, other government agencies and others. Then there will more discussions and possibly court challenges, with a final rule likely a year from now. For all those reasons, the power sector analyst said, "People felt it was not yet actionable, because they don’t know what it’s going to look like in the end."
+ There's a lot of flexibility, so the rule's impact will vary widely by state. The EPA plan sets targets for states to hit, but leaves it to each state to determine how to achieve the carbon emission reductions. That makes it harder to draw conclusions about the effects on individual companies or sectors until the states put their plans together. Also, the flexibility means that states that rely heavily on coal-fired power plants have options that could help them avoid some shutdowns.
"Part of what the EPA was trying to do, and I think they did a pretty good job of it, was to create a degree of flexibility that will allow the electric power sector to adjust to this relatively easily," said Kennedy of the World Resources Institute. That, he said, "is part of why you see a muted reaction from the industry and some of the states."
+ The rules won't take effect for years. The states have until 2018 to submit their emission-reduction plans. Then the EPA has a year to review them, which puts implementation into 2019. "Consequently, the economic implications are more than four years down the road, and equity investors are remarkably short-sighted," said the power sector analyst.
+ The political landscape could change before the rules take effect. Republicans hope to gain a majority in the Senate in the next elections, and there will be a new administration in the White House in 2017. In certain scenarios, the whole goal of cutting emissions could get scrapped.
All those factors create room for doubt about the impact the rule will ultimately have on companies, industries, consumers and the economy as a whole. So for now, Wall Street investors are not buying the rhetoric about catastrophic ripple effects.
"The political backlash is just part of the ball game," the power sector analyst said.