Keystone XL was a monumental turning point…and now Obama is taking on coal

15 January 2016
Articles and blogs
Shelagh Whitley and Mark Fulton

President Obama’s rejection of the Keystone XL pipeline last November signalled a landmark shift in the US approach to its future energy needs. He was hailed as the first world leader to refuse a project due to its effect on the climate.

Environmentalists and the general public alike – quite rightly – celebrated his decision. Finally, perhaps, leaders were taking this global threat seriously.

While the denial of the tar sands pipeline is clearly an important move, when it comes to tackling climate change, coal remains the biggest contributor to carbon emissions. And this is where the current administration has a chance to build on the Clean Power Plan and bring rational forces to markets.

Overall the US provides more than $20 billion a year in subsidies to the production of fossil fuels. While the bulk of this is directed towards oil and gas companies, coal producers also reap significant benefits. When coal’s high carbon content is taken into consideration, subsidies and state support offered to this fuel are likely have the highest climate impacts.

Reducing this support to coal production could therefore be one of the US government’s next key climate policies. It looks like in 2016, the Obama administration may finally be taking this on.

Earlier this week in his State of the Union Address, Obama stated that we must ‘change the way we manage our oil and coal resources, so that they better reflect the costs they impose on taxpayers and our planet.’ And today administration official are set to announce a halt to new coal mining leases on public lands as they consider an overhaul of the programme.

This could be an important move for the US in finally meeting its commitments to phasing out fossil fuel subsidies. In spite of declining global demand for coal, the US government is continuing to provide significant subsidies to coal mining. In the Powder River Basin (PRB) – the largest reserve in the US, supplying 40% of the country’s coal – something perverse is happening.

First off, although huge amounts of coal come from government-owned land in the PRB, it is for some reason not officially designated as a ‘coal-producing region’. This means that coal companies are able to lease federal lands at a lowered cost. And these under-valued leases added up to a subsidy to coal companies, and lost revenue to the government, of more than $1 billion in 2012.

Meanwhile, the government is also subsidising coal from the PRB through below market royalties. Currently, royalty payments for coal from the PRB are based on the initial, as opposed to the final, sale price. This creates a loophole that some companies exploit by selling coal to their own affiliates at a below market price thereby paying a low royalty, after which they then go on to re-sell the same coal to foreign buyers at a far higher price. A 2012 Reuters investigation estimated that this loophole cost the government $40 million on coal exports from Wyoming and Montana in 2011.

The costs of these subsidies to coal in the PRB are hitting US taxpayers through lost state revenue, and through huge climate impacts. Coal from the PRB is used in over 200 power plants across 35 states, making it one of the US’s largest sources of greenhouse gas emissions, equivalent to the annual emissions of 70% of all cars registered in the US. The US government’s continued subsidies to coal mining in the PRB mean it is paying fossil fuel producers to undermine its own climate commitments.

A recent report showed, for the first time, the climate benefits that could arise from eliminating subsidies to coal production in the PRB. This research found that removing these subsidies – amounting to nearly $8 per tonne – would materially reduce domestic coal demand in the United States (by between 8% and 29%) and result in cumulative emissions reductions of 0.7 to 2.5 gigatonnes (Gt) of CO2 to 2035. For comparison, India’s CO2 emissions from fossil fuel combustion and industrial processes were 2.1 Gt in 2013.

By rejecting the Keystone XL pipeline, President Obama showed true leadership and signalled a potential shift in the battle against dirty energy. It is commendable that the US government is now taking on coal, and moving one step closer to removing perverse support to fossil fuel production.

Shelagh Whitley is a Research Fellow at the Overseas Development Institute and Mark Fulton is the Founding Partner at Energy Transition Advisors (ETA) and Advisor to Carbon Tracker Initiative

Shelagh Whitley, Mark Fulton