January 27, 2016

Niskanen Report: Why the Coal Industry Should Embrace a Carbon Tax



EXECUTIVE SUMMARY

The coal industry is in an economic free-fall due to low-cost natural gas and an incoming wave of steep environmental regulatory costs. Evidence of coal’s trouble can be found in its declining share of the electricity market, plant and mine shutdowns, corporate earnings, debt-to-equity ratios, an impending federal leasing moratorium, and dramatic declines in stock prices. Corporate asset values are premised upon implausible assumptions about future coal demand in a carbon-constrained world. Claims that exports will save the industry are highly dubious. Political campaigns to slow down the regulatory onslaught have some prospect for success, but at best, they only borrow time. Reversing environmental regulatory activity holds a near-zero chance of success.

The only hope the industry has to meaningfully prolong its economic life is to support a carbon tax that would, as part of the deal, end EPA regulation of greenhouse gases. A carbon tax designed to achieve the same emission reductions sought under the Clean Power Plan (CPP) would be less punishing to the coal industry than current regulation. While a carbon tax designed to produce substantially greater emission reductions than the CPP could be costlier to the coal industry than existing regulation, the industry could likely secure a host of valuable aid and assistance in return for supporting a carbon tax bill. Such a package would, on balance, leave them better off economically than under the status quo.

There are compelling reasons for liberals and conservatives to embrace a deal along these lines. Liberals would avoid the risks of administrative, legal, and political delays that threaten to critically undermine the imperative to act now to reduce climate risks. Moreover, they will likely achieve more emission reductions than will be achieved under current policy. Conservatives would secure a less regulatory, more efficient, and less costly policy of climate action. And both the Left and the Right have a stated interest in minimizing the damage to communities that will be negatively affected by a collapse of the coal sector.

Read the report in its entirety here.