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Coal Woes (and NEPA)

Two recent NEPA cases illustrate both U.S. coal producers’ current woes and why those may soon get much worse.

Coal’s current troubles are illustrated first by Kentucky Coal Association v. Tennessee Valley Authority, filed on July 10, wherein the Kentucky Coal Association (“KCA”) sued TVA over alleged National Environmental Policy Act (NEPA) violations arising out of TVA’s decision to convert two 704 MW coal-fired units to natural gas. Times, they are a changing when the coal industry sues TVA – owner of the nation’s largest coal-fired fleet – for violating NEPA.

KCA complains that TVA improperly dodged preparation of a full-blown environmental impact statement, by concluding that switching these two units from coal to gas would not cause significant environmental impacts. In fact, KCA says that just adding the control technology necessary to meet EPA’s recent mercury and hazardous air pollutants (HAPs) rule is “the more environmentally sound approach” than switching to natural gas – which has virtually no mercury or HAP emissions at all.

But what really angers KCA is CO2: “TVA prejudged the outcome of the NEPA process in an attempt to ‘comply’ with President Obama’s Climate Action Plan, which lacks force of law”, and TVA “inappropriately elevate[d] carbon dioxide (CO2) emissions and related air quality issues above all other environmental impacts.” Not only did TVA “inappropriately” drag in CO2, but – and this is the best part — TVA failed to accurately assess the relative emissions of coal and gas plants: “Had TVA done so, it would have found that as the fugitive methane emissions from natural gas increase, natural gas loses any advantage over coal altogether on a lifecycle greenhouse gas (GHG) basis.” This is because “a best estimate of fugitive methane emissions from unconventional (i.e., hydraulic fracturing) natural gas production can be as high as 9% of total production.” While we (and most recent studies) tend to think the actual emissions number is much lower, we note that the use of “a best estimate” and “can be” together is the sort of verbal trickery the KCA would be all over if it was used by a climate scientist.

Wow. Strange enemies (KCA and TVA), meet strange bedfellows: The Kentucky Coal Association and the Center for Biological Diversity. We eagerly await further developments.

A June 27 decision from the federal district court in Colorado (High Country Conservation Advocates v. U.S. Forest Service) previews the second potential round of trouble for the coal industry. Judge R. Brooke Jackson held that if a federal agency did a cost-benefit analysis under NEPA, then the agency must either use the federal social cost of carbon (“SCC”) to value the cost of greenhouse gas emissions, or explain why it was inappropriate to do so.

High County involved coal leasing on federal land, an increasingly sensitive issue. While NEPA requires weighing of the project’s “merits and drawbacks”, it does not explicitly require a monetary cost-benefit analysis. However, if – as here — the agency does such an analysis, the court held that it cannot dismiss the impacts of both methane released from mining and CO2 emissions from burning as “unquantifiable”. Noting that the SCC “was expressly designed to assist agencies in cost-benefit analyses” the court held that failure to either use the SCC (or explain why it was not appropriate) unjustifiably set the cost of these emissions at zero.

High Country could have enormous consequences for Powder River Basin coal. Most PRB coal is on federal land, and (due to its lower quality) PRB coal is extremely cheap ($12.50/ton) compared to bituminous ($44.50-$64.50/ton). When burned, a ton of PRB coal releases about 2 tons of CO2. Given the latest global SCC estimate of $33/ton, it will become increasingly difficult for the government to justify strip mining federal land for coal with a market value of $12.50 that will cause $66 in damage (not including the emissions associated with mining and transportation). Even using the much lower “domestic only” SCC, would make it questionable. Now, as the judge grapples with the question as to what exactly he should order the defendants to do to fix this violation, it is not surprising that the federal defendants have said that “the questions of what remedy is appropriate and what courses of action the Agencies may need to take are quite complicated and require policy decisions at high levels.”

It will also be interesting to see how this plays out in terms of coal companies’ asset valuation: As we have noted before, right now, coal companies are booking upwards of 40 years of PRB production from federal lands as assets; a true paradigm shift in U.S. coal policy would ensue if the Feds begin to exercise their rights to review/terminate these leases. (And just wait till the plaintiffs’ securities lawyers see –and understand — this.)

Stay tuned.