Recently proposed federal rules on mining royalties, intended to close loopholes that subsidize exports of coal mined from public lands, may instead end up giving away the coal to the industry for free, according to an environmentalist think tank.
Cut-rate royalties have persistently shortchanged the public, according to critics, when vast expanses of public land are leased by the government to coal mining companies. But this newly disclosed flaw in the Obama administration's plan to fix the problem means that its solution might backfire, eliminating royalties completely in some circumstances.
Royalty payments are supposed to be 12.5 percent of gross proceeds from the sale of the coal, minus deductions for some transport and other costs. Because of loopholes, mining companies have been paying less than that for years. Even so, the payments rake in about $1 billion a year.
Public comments filed by Tom Sanzillo of the Institute for Energy Economics and Financial Analysis, an environmental advocacy group, described how the proposal could reduce royalties to zero. As long as coal prices remain so low, the deductions allowed by the proposal would make export sales worthless on paper, and the royalties would vanish like disappearing red ink.
In an interview, he called it an "inadvertent problem that they should watch out for, but that should be easily correctable" by setting some floor on royalties.
The period for formal public comments on the proposal, which has been in the works for months, ended this week.
Additional comments filed by Friends of the Earth complained that fossil fuel leasing decisions by the Interior Department and its Office of Natural Resources Revenues "have a material and significant impact on U.S. and global carbon emissions, which is not currently reflected in how these fuels are valued for royalty purposes." It presented an analysis by the Climate Accountability Institute, which found that Interior's leases of oil, natural gas and coal-produced fossil fuels are responsible for about one quarter of U.S. carbon dioxide emissions and more than 3 percent of global fossil fuel emissions between 2003 and 2014. Taken together, the two sets of comments depict heavy costs and slim benefits of coal sales from public lands at a time when the Obama administration is seeking to join a worldwide shift to greener energy.
"As written, the proposed regulations appear to reduce royalty payments to zero in a low-price environment (such as exists now)," Sanzillo said in his formal comments..
If not corrected, he said, federal and state governments – which split the royalties on coal extracted from public lands – will lose, not gain revenues, on each ton of coal dug up from giant deposits like those in the Powder River Basin which get hauled off by the trainload to be sold in overseas markets.
Under current regulations, the industry has been exploiting exceptions and loopholes in ways that have lowered the government's share, leading to calls for reform and to the latest proposal, which is opposed by the struggling coal industry. Coal producers are already reeling from shifting world markets, competition from natural gas and renewables, and mounting federal regulations aimed at carbon dioxide and a host of other pollutants.
Critics led by Senator Ed Markey, Democrat of Massachusetts, have called for suspending coal leasing. Under pressure, the Obama administration developed this rule.
In a recent speech, Interior Secretary Sally Jewell said: "We need to ask ourselves: Are taxpayers and local communities getting a fair return from these resources? How can we make the program more transparent and more competitive? How do we manage the program in a way that is consistent with our climate change objectives? These are hard questions. But it's time for an honest and open conversation about modernizing the federal coal program."
One change in the Obama administration's proposed rules would eliminate an export exemption that calculates royalties on the basis of the domestic U.S. price, not the world price, when coal is sold overseas. Right away, this lowers the payment received by the public for its coal.
Another change would shut down a gimmick the companies have used to evade royalties: using wholly owned subsidiaries to handle their coal exports. The coal is first sold to the subsidiaries for a low price, on which royalties are based. Then the subsidiaries mark up the price and resell the coal. The new rules would base royalties on the first "arms-length" transaction, not on the sticker price paid when the mining companies sell the coal to themselves.
But according to Sanzillo, neither of these patches will fix the problem of subsidized coal now that world coal prices have plummeted to less than $60 a ton from more than $140 several years ago.
"In this low-price environment, the new rules will produce very little royalty revenue, and may even result in zero royalties in some cases," Sanzillo wrote.
He estimated that it might take many years for international coal prices to recover to a point where royalties would rebound.
"The federal government, as the owner of the coal, must decide whether it is in its interest to allow coal to be mined and sold to other countries if the federal government and the states receive no money for it," he said. "Very few private owners would accept a decade of receiving almost no revenue in order to sell a product that is already oversupplied on the world market."