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DOI's Coal Leasing Review Presents a New Opportunity for President Obama to Price Carbon

Nathan Ratledge's picture
Resources for the Future / Apogee EP
  • Member since 2018
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  • Jun 21, 2016
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President Obama came to office promising comprehensive action on climate change stating in 2008 that “My presidency will mark a new chapter in America’s leadership on climate change”. Following the Senate’s failure to pass cap and trade legislation in 2009, the President chose the more sensible solution of pursing climate legislation via executive action rather than fighting a virtually unwinnable battle on Capitol Hill. While practical in approach, this strategy largely set aside any ambition of pricing or capping greenhouse gas (GHG) emissions. Coincidentally, a recent agency action from the Department of the Interior (DOI) presents a new and unique opportunity to implement carbon pricing.

In the summer of 2013 the President announced his reworked vision for the U.S. to address climate change – the Climate Action Plan. The centerpiece of his strategy would eventually become the Clean Power Plan (CPP), which aims to reduce emissions in the electricity sector by 32% by 2030.

Outside of his central platform the President has instituted emissions mitigation strategies across a diversity of sources including venting and flaring in the oil and gas sector, efficiency upgrades for appliances and updates to transportation efficiency standards. He has also increased financial and research support for clean energy development and climate adaptation. Despite these myriad actions, carbon pricing prospects remained illusive.

In January 2016 a less obvious opportunity to address GHGs came from the DOI. Due to longstanding concerns related to taxpayer fairness and transparency, DOI announced a formal review of the federal coal-leasing program in the form of a Programmatic Environmental Impact Statement (PEIS).

At the January announcement DOI Secretary Sally Jewell stated, “we have an obligation to current and future generations to ensure the federal coal program delivers a fair return to American taxpayers and takes into account its impacts on climate change”.

A spate a recent and forthcoming literature has laid out the economic argument for royalty reform – suggesting that coal is being priced below market rates and shorting the taxpayer (GAO 2013, Sanzillo 2012, Lee-Ashley and Thakar 2015, Peterson 2015, Headwaters Economics 2015).   Royalty reform, coupled with updates to bonding agreements and increased transparency, are common sense steps toward creating greater fairness for the American public. While significant, these actions do not begin to address the substantial negative costs associated with climate change.

Lately, an evolving discussion in some energy circles has asked an important question. Could DOI include a carbon adder (a price on carbon) as part of federal royalty payments for coal produced on public lands?

Several papers have begun to weigh in. A report from Resources for the Future (RFF) concluded that the Bureau of Land Management (BLM) has the statutory and regulatory authority to impose a carbon price on federal fuel production. Yet, RFF researchers cautioned that applying the social cost of carbon (SCC) to lifecycle emissions (from mine to power plant) is politically untenable due to the outsized increase in coal prices.

A report from Vulcan Philanthropies shows that at 2016 SCC values a ton of coal would cost $77, over 1.5x the average cost of coal delivered to electricity plants. The substantial difference between current prices and a cost that incorporates climate externalities further underscores that American taxpayers are not receiving fair value for their fossil fuel assets. Importantly for policy makers, Vulcan also found that while increasing royalties would have a modest negative impact on federal coal production, net royalty payments to states and the federal government would actually increase.

Realistically, the potential cost to coal from applying a lifecycle SCC limits the Obama administration in the near-term.   Given these political restrictions a more nuanced approach could set the ball in motion for carbon pricing. DOI and the BLM could impose a carbon adder that addresses upstream (or direct) emissions – pricing emission from the mining and production process that occur on federal lands.

This approach is a practical first step for two primary reasons. First, an upstream adder would capture only the emissions that occur directly on federal lands, which are more straightforward to quantify and price on a mine-specific basis. Second, the upstream adder is much smaller than the lifecycle cost (less than 10% of total emissions occur upstream); and therefore, an upstream carbon adder is more realistic from a policy perspective.

The price associated with upstream emissions would cost roughly $2 to $3 per ton of coal. That SCC value represents about 4% – 7% of the average 2014 sales value for coal delivered to electric utilities.

Extrapolating from Vulcan’s analysis, an upstream carbon adder of this magnitude would have modest near-term emissions impact. But, absent the first best option – an economy wide carbon fee, an upstream carbon adder begins to move the economy closer toward the socially optimal level of production. An upstream adder could also easily be extended to federal oil and gas leases.

In light of Congressional obstruction, President Obama has successfully moved the needle on climate change through specific, economically smart strategies – for which he should be lauded. Perhaps unexpectedly, DOI’s coal review presents a new chance for the White House to begin pricing carbon emissions. Taking leading action on this unique policy window would mark a truly historic paradigm shift for energy, climate and taxpayer fairness.

Photo Credit: Pete Prodoehl via Flickr

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