Recently we wrote about how the Obama Administration had truly fired the opening shot in its alleged War on Coal when it suspended future coal leasing activities on federal lands, as it prepares a “programmatic” environmental impact statement on the effects of such leases. Up until then, the Administration’s few measures to actually reduce coal-fired power generation (including the Clean Power Plan) amounted more or less to codifying what the market—mostly in the form of low natural gas prices—was already doing.
Last week, the Interior Department issued its formal notice starting the scoping process for its review. But now, it turns out that the review is being somewhat pre-empted by a long- standing court case that may put the Administration in a very uncomfortable position. While the Administration says it wants to take a hard look at the impacts of, and alternatives to, burning federal coal, it is poised to repeat its arguments—in a federal appellate court—that federal coal leases don’t have any impact on CO2 emissions. If that coal is not mined and sold, the administration says, then an equivalent amount of coal from private lands (or imports) will be … and thus there is no reason to even consider any alternatives to the federal lease.
In essence, in an open economy, the government can regulate demand. But when it comes to regulating supply, the government can’t assume that just because it bars coal production on public lands, the same amount of coal won’t be produced somewhere else.
Let’s reiterate: on the one hand the Administration loudly announces that it will “examine how best to assess the climate impacts of continued Federal coal production and combustion.” On the other hand, in considering objections to leasing 2 billion tons of federal coal—more than twice the amount of coal burned annually for electricity in the United States—the government’s position is that not only would “other sources of coal would be available to satisfy market demand” if that coal was not leased (which over the lifetime of the mines, seems plausible), but also that taking that amount of federal coal off the market would have no impact on the market price of coal, and thus could not lead to reduced demand.
This is a hard sell and it gets to the heart of a question that Secretary Jewell explicitly included in the planned programmatic review: “how the administration, availability, and pricing of Federal coal affect[s] … energy markets in general, including the pricing and viability of other coal resources (both domestic and foreign) and other energy sources.” Interior’s notice last week summarized this as “evaluation of potential substitution effects from any changes in federal coal production.” In other words, would restricting the supply of federal coal make U.S. coal in general more expensive, and thus discourage its use and thereby help address climate change?
While the chain from supply restriction to demand reduction is dependent on many assumed links, it’s not implausible. And while it might increase domestic prices of low-sulfur coal (we have our doubts about its impact on the wider domestic market), the larger issue is that it certainly won’t affect the world price unless there’s a big change of heart in other coal producing capitals. And there is absolutely no sign that the Germans, let alone major coal producing countries like China, Vietnam or Colombia, are willing to consider this. (Beleaguered domestic natural gas suppliers, producing overwhelmingly on private land, would certainly be cheered by any resulting rise in U.S. coal prices.)
The Administration’s self-inflicted dilemma is illustrated by this excerpt from the district court brief filed by BLM:
Plaintiffs] accuse BLM of ignoring “the economic reality that a significant decrease in low-cost coal supply resulting from a decision not to authorize the Leases, would raise the cost of coal from other sources.” [citation omitted.] They argue that BLM should have considered a scenario in which this raised cost would lead to a decreased demand for and use of coal.
BLM does not share this view.
Not surprisingly, a federal judge in Wyoming upheld BLM’s decision and, next week, DOJ and BLM will file their brief in the 10th Circuit appeal. We are at a loss to understand why BLM does not agree to a remand of this lease until the programmatic Federal review is completed. Not doing so is forcing BLM to choose between defending a perhaps implausible “old” position and prejudging the results of the programmatic Federal review. But in the Keystone Cops world of the Administration’s approach to coal, this is par for the course.