Federal Minerals Leasing Reform and Climate Policy

Problem

Nearly half of coal produced in the United States is mined from federal government lands. The federal government therefore has an unusual degree of control over the domestic production and consumption of this fossil fuel. Given that the use of federal coal generates 13 percent of U.S. energy-related carbon dioxide (CO₂) emissions, federal coal policy also has important climate change implications. In recent years, both Democratic and Republican administrations have made efforts to mitigate U.S. CO₂ emissions by reducing use of fossil fuels through a variety of programs. However, federal coal policy has yet to reflect these efforts. 

Proposal

The authors propose reforms to the federal minerals leasing program that address the negative climate effects associated with coal mining in an efficient manner that benefits the taxpayer. Specifically, they propose applying a royalty adder of 20 percent of the social cost of carbon to new and renewed federal coal leases in order to reduce but not eliminate federal coal production, thereby reducing total power sector CO₂ emissions. The authors project that an additional $3 billion annually would be collected, which they would allocate to programs that support residents of coal communities in transition. 

Abstract

Through its minerals leasing program, the U.S. government plays a large role in the extraction of oil, natural gas, and coal. This footprint is the largest for coal: 41 percent of U.S. coal is mined under federal leases, and burning this coal accounts for 13 percent of U.S. energy-related carbon dioxide (CO₂) emissions. Currently, producers and consumers of this coal do not bear the full social costs associated with its use. At the same time, the threat of climate change has led the international community, including the United States, to pledge significant reductions in CO₂ emissions. Over the past two decades Democratic and Republican administrations have taken steps to reduce U.S. CO₂ emissions by reducing use of fossil fuels. Despite growing public attention to the climate consequences of fossil fuel extraction, U.S. climate policy so far has not extended to the government’s role as a major source of fossil fuels. In a new paper from The Hamilton Project and the Energy Policy Institute at the University of Chicago, Kenneth Gillingham and James Stock propose to incorporate climate considerations into federal coal leasing by placing a royalty adder on federal coal that is linked to the climate damages from its combustion. The magnitude of the royalty adder should be chosen to recognize both the substitution of nonfederal for federal coal, and the interaction of the royalty adder with other climate policies. A royalty adder set to 20 percent of the social cost of carbon would reduce total power sector emissions, raise the price of federal coal to align with coal mined on private land, increase coal mining employment in Appalachia and the Midwest, and provide additional government revenues to help coal communities. This proposal strikes a middle path between calling for a stop to all federal fossil fuel leasing on the one hand, and relying entirely on imperfect downstream regulation on the other.