Federal coal subsidies

{{#badges: CoalSwarm}} Federal coal subsidies are forms of financial assistance paid by federal taxpayers to the coal and power industry. Such subsidies include direct spending, tax breaks and exemptions, low-interest loans, loan guarantees, loan forgiveness, grants, lost government revenue such as discounted royalty fees to mine federal lands, and federally-subsidized external costs, such as health care expenses and environmental clean-up due to the negative effects of coal use, as well as the loss or degradation of valuable ecosystem and community services.

Contents

Government Funding and Loans for Coal Plants

A 2010 report by Synapse Energy Economics, "Phasing Out Federal Subsidies for Coal" found the U.S. federal government continues to provide billions of dollars in subsidies for the coal industry, despite stated calls by the executive and legislative branches to reduce greenhouse gas emissions. The report was written by Lucy Johnston (Synapse Energy Economics), Lisa Hamilton (Rockefeller Family Fund), Mark Kresowik (Sierra Club), Tom Sanzillo (TR Rose Associates), and David Schlissel (Schlissel Technical Consulting) and was released on April 13, 2010.

The report identifies four major areas where taxpayer money continues to fund the construction, expansion, and life extension of coal-fired power plants, thus acting as federal coal subsidies:

1. Financial support for the World Bank and other international financial institutions that finance fossil fuel use and extraction;
2. U.S. Treasury Department’s backing of tax exempt bonds and Build America Bonds for use in the electric sector;
3. U.S. Department of Agriculture’s Rural Utilities Service provision of loans, loan guarantees and lien accommodations to power companies that are investing in new or existing coal plants;
4. Tax credits, loans and loan guarantees through the U.S. Department of Energy.

The World Bank and other International Finance Institutions

The United States is the largest contributor to the World Bank and a major supporter of other international financial institutions such as the Inter-American Development Bank and the African Development Bank. The United States also provides subsidized financing internationally through the Overseas Private Investment Corporation and the U.S. Export Import Bank. International financial institutions have helped finance 88 new and expanded coal plants since the United Nations Framework Convention on Climate Change (UNFCCC) came into effect in 1994, providing more than $137 billion in direct and indirect financial support for new coal-fired power plants.

Examples of World Bank Funding

Two recent examples of World Bank support for new coal plants include:

• The 4,000 MW Tata Ultra Mega Power Project in India, with construction funded by the World Bank and the Asian Development Bank. It is scheduled to be completed by 2012.
• South African power company Eskom’s proposed 4,800 MW Medupi Power Station, one of the largest in the world. The World Bank has approved more than $3 billion and the African Development Bank also provided more than $500 million in financial support for the project.

Report Recommendations

The report calls for the U.S. government to take aggressive action to make the World Bank follow the recommendation of the bank's own Extractive Industries Review and withdraw from financing coal development, or else phase out U.S. support, starting with rejection of funds and continuing with a refusal to reauthorize the Clean Technology Fund under the Bank’s purview.

U.S. Treasury Department: Tax-exempt and Build America Bonds

The Treasury Department’s financial policies currently result in subsidies to owners and developers of coal-fired power plants, particularly tax-exempt financing and interest subsidies for certain bonds that place millions of taxpayer dollars in coal plant investments. Tax-exempt financing is a federal tool used by states and local public authorities to provide billions of dollars in subsidies to build new coal plants and extend the life of existing coal plants: the federal government provides financial assistance to eligible utilities that operate coal-fired power plants through tax-exempt financing, commonly referred to as tax-exempt bonds or municipal bonds. Under Internal Revenue Code (Section 103(a)) the interest earned on any state or local bonds is not included in gross income and is therefore exempt from federal income tax. States, local governments, and Rural Electric Cooperatives use tax-exempt bonds to finance a variety of investments, including investments in power plants and transmission lines.

Examples of U.S. Treasury Department Funding

Examples of new or proposed coal-fired power plants that are funded in part by tax-exempt debt include the following:

• The Prairie State Energy Campus Project in Illinois is a mine-mouth 1600 MW supercritical steam turbine power plant without carbon capture technology. The more than $4 billion plant has several participating partners, with one partner, the Northern Illinois Municipal Power Agency (NIMPA), buying 120 MW of the 800 MW plant with $303 of its $318 million investment portion financed with tax-exempt debt.
• The Longleaf Energy Station in Georgia is a proposed 1200 MW pulverized coal fired power plant supported by the Early County (Georgia) Development Authority with federally backed local development bonds.
• The Two Elk coal plant in Wyoming is a proposed coal plant that purports to use so-called “waste coal” and has received hundreds of millions of dollars in tax-exempt debt authority since it was classified as a solid waste recycling facility. Approval for the tax-exempt financing is currently being audited by the Internal Revenue Service.

Build America Bonds: Additional Source of Funding

A new program under the American Recovery and Reinvestment Act, Build American Bonds (BABs), expands the U.S. Treasury’s use of financing tools to subsidize coal-fired power plants. Under the program, issuers of the taxable bonds are provided a 35% direct pay interest subsidy to reduce the costs of borrowing. Power companies are eligible for these federally subsidized taxable bonds funding under BABs: American Municipal Power Ohio used the tax-exempt bond market to finance the construction of the Prairie State Energy Campus in Illinois and, after the 2009 financial crisis began, issued through the BABs program nearly $500 million dollars of federally subsidized taxable bonds to finance the last phases of construction. The bonds have also been used for scrubbers at existing plants.

Report Recommendations

Traditionally, federal tax-exempt funding has been reserved for low risk activities, but given calls for increased regulation of coal waste and coal ash, the decreasing cost of renewable energy, uncertain coal reserves, and potential cap and trade and carbon tax policies, coal-fired power plants are no longer low-risk investments. The report argues that, due to the risks inherent in coal plant investments, the Federal Government should ensure that disclosure of the financial risks associated with investment in coal-fired power generation is robust and sufficient to permit informed investment and mitigate bond market impacts. Since these risks are not disclosed in a transparent fashion to investors who buy tax-exempt bonds or the federally subsidized taxable BABs, there is misalignment between federal funding and federal energy goals.

U.S. Department of Agriculture’s Rural Utilities Service

The United States Department of Agriculture (USDA) provides assistance to rural electric utilities through the Rural Utilities Service (RUS), which provides direct loans and loan guarantees to rural utilities for the construction or retrofit of electrical transmission, distribution, or generation facilities. The RUS has halted its direct loans for coal-fired power plants; however, it still provides financial assistance to its clients to assist borrowers in obtaining financing from other lenders, and provides loans and loan guarantees to electric cooperatives for purposes other than developing coal-fired power plants.

Lien Accommodation

RUS has recently approved a lien accommodation for the East Kentucky Power Cooperative, Inc. The approval allows the cooperative to move forward with a loan of more than $900 million to construct a new coal-fired power plant. The lien arrangement places other lenders ahead of RUS in receiving reimbursement, if any, in the event of default or foreclosure of the loan, and also gives RUS the option of releasing a lien outright instead of accommodating or subordinating it, placing taxpayer dollars at risk because of the financial vulnerability of RUS borrowers. Borrowers who had high costs, and were unable to raise rates because of regulatory and/or market constraints posed a particular risk of loss to the federal government.

Rural cooperatives are particularly vulnerable since they do not retain profit, and thus have low cash reserves. In 1996, about $982 million of loans were written off and forgiven because a cooperative had invested in an uneconomical nuclear plant and couldn’t sell its electricity at a price sufficient to service its RUS loans. In 1997, RUS wrote-off and forgave loans of about $502 million because a borrower couldn’t recover costs for a coal-fired generating plant when anticipated demand did not materialize.

Funding for Retrofitting Old Coal Plants

Retrofits to existing coal plants, such as scrubbers to comply with the Clean Air Act, may qualify for RUS funding but may not be the best use of such funding: while a retrofit to address a given regulatory requirement may appear cost effective, comprehensive analysis of investment in the plant considering all possible cost sources (regulation of greenhouse gasses, criteria air pollutants, hazardous materials, and coal waste) could reveal that the plant itself is no longer cost effective under existing or likely conditions.

Report Recommendations

The report therefore calls for RUS to (1) permanently halt granting loans and loan guarantees for the construction of new coal-fired power plants, (2) review its policies for loans and loan guarantees for coal-fired power plant retrofits, (3) develop a prudence standard for lien accommodations, lien subordinations and lien releases, (4) require electric cooperatives to plan and take action to reduce their emissions of carbon dioxide and other greenhouse gases, and (5) suspend lien accommodation or subordination for coal plants using the same financial risk analysis it has adopted to stop funding new plants.

U.S. Department of Energy Tax Credits, Loans, and Loan Guarantees

Title XVII of the Energy Policy Act of 2005 (EPAct 2005) established a loan guarantee program within the Department of Energy (DOE) to foster "innovative technologies." In a federal loan guarantee program, the government guarantees that it will pay lenders if a borrower defaults on a loan, helping borrowers obtain credit on more favorable terms than would be available in private lending markets. The new DOE loan guarantee program targets energy projects that meet three criteria: (1) avoid, reduce or sequester air pollutants or greenhouse gases, such as carbon capture; (2) employ new or significantly improved technologies; and (3) have a reasonable likelihood of repayment.

In 2007 DOE invited 16 projects to submit applications for loan guarantees. Two of the projects are Integrated Gasification Combined Cycle (IGCC) coal-fired power plants and one would use IGCC technology to produce synthetic gas from coal for chemical feedstocks. In 2008, DOE issued solicitations for $6 billion in loan guarantees for projects that incorporate carbon capture and sequestration (CCS) or other emissions-reducing carbon technologies into retrofitted and new coal plants, or industrial gasification activities, and $2 billion for loan guarantees for advanced coal gasification projects.

Examples of Department of Energy Funding

In 2009, the DOE selected several projects for final loan guarantee negotiation. These projects included:

• Tenaska's Taylorville Energy Center – loan coverage $2.6 billion for a 730 MW coal-fired IGCC with CCS.
• Leucadia's Indiana Gasification SNG project – loan coverage of $1.6 billion to produce Substitute Natural Gas (syngas) from coal for sale to customers in Indiana, with proposed carbon capture for enhanced oil recovery.
• Leucadia's Mississippi Gasification SNG project – loan coverage of $1.689 billion to produce syngas from petroleum coke feedstock, for sale to electric utilities in the region, with proposed carbon capture for enhanced oil recovery.

Report Conclusions

The report concludes that the Obama Administration "has taken a proactive approach to leading the country towards a clean energy future. Numerous initiatives among federal agencies, including support for federally mandated carbon restrictions, a moratorium on direct loans for coal-fired power plants, Treasury guidance for development banks’ lending for coal-fired power plants, SEC guidance for public companies regarding climate change risk, are all evidence of an increasing awareness of the interplay between energy and environmental policy and financial policy. There remain certain distinct areas where federal financial policy implementation is not consistent with, and is even in conflict with, clear federal efforts to adapt to a carbon constrained future. Inconsistencies in federal policy require federal administrative intervention; private companies will not necessarily remedy the inconsistency. The disconnect between federal policies not only sets the nation back in achieving energy and environmental policy goals, but also places taxpayer dollars at risk. As regulatory policy changes, as financial circumstances change, so must the administrative financial policies of the federal government."

Lost Government Revenue

The study U.S. Government Subsidies for Energy Sources 2002-2008 was released in September 2009 by the Environmental Law Institute. The report was authored by Adenike Adeyeye, James Barrett, Jordan Diamond, Lisa Goldman, John Pendergrass, and Daniel Schramm, and funded by the Energy Foundation.

According to the report, fossil fuel subsidies fall roughly into two categories:

1. foregone revenues, such as a) provisions in the U.S. Tax Code that reduce the tax liabilities of particular entities, and b) lost government revenue from offshore leasing through the under-collection of royalty payments;
2. direct spending, in the form of expenditures on research, development, and other programs.

All fossil fuels

The study included the following major conclusions:

• The vast majority of federal subsidies for fossil fuels and renewable energy supported energy sources that emit high levels of greenhouse gases when used as fuel.
• The federal government provided substantially larger subsidies to fossil fuels than to renewables. Subsidies to fossil fuels—a mature, developed industry that has enjoyed government support for many years—totaled approximately $72 billion over the study period, representing a direct cost to taxpayers.
• Subsidies for renewable fuels, a relatively young and developing industry, totaled $29 billion over the same period.
• Subsidies to fossil fuels generally increased over the study period (though they decreased in 2008), while funding for renewables increased but saw a precipitous drop in 2006-07 (though they increased in 2008).
• Most of the largest subsidies to fossil fuels were written into the U.S. Tax Code as permanent provisions. By comparison, many subsidies for renewables are time-limited initiatives implemented through energy bills, with expiration dates that limit their usefulness to the renewables industry.
• The vast majority of subsidy dollars to fossil fuels can be attributed to just a handful of tax breaks, such as the Foreign Tax Credit ($15.3 billion) and the Credit for Production of Nonconventional Fuels ($14.1 billion). The largest of these, the Foreign Tax Credit, applies to the overseas production of oil through an obscure provision of the Tax Code, which allows energy companies to claim a tax credit for payments that would normally receive less-beneficial tax treatment.
• Almost half of the subsidies for renewables are attributable to corn-based ethanol, the use of which, while decreasing American reliance on foreign oil, raises considerable questions about effects on climate.

Coal

The study singled out the following major subsidies benefiting the coal industry:

• Credit for Production of Nonconventional Fuels (annual subsidy: $14 billion)- IRC Section 45K. This provision provides a tax credit for the production of certain fuels. Qualifying fuels include: oil from shale, tar sands; gas from geopressurized brine, Devonian shale, coal seams, tight formations, biomass, and coal-based synthetic fuels. This credit has historically primarily benefited coal producers.
• Characterizing Coal Royalty Payments as Capital Gains (annual subsidy: $986 million) - IRC Section 631(c). Income from the sale of coal under royalty contract may be treated as a capital gain rather than ordinary income for qualifying individuals.
• Exclusion of Benefit Payments to Disabled Miners (annual subsidy: $438 million) - 30 U.S.C. 922(c). Disability payments out of the Black Lung Disability Trust Fund are not treated as income to the recipients.
• Exclusion of Alternative Fuels from Fuel Excise Tax (annual subsiy: $343 million) - IRC Section 6426(d). This section applies to liquified petroleum gas (LPG), P-series fuels (defined at 42 U.S.C. 13211(2)), compressed natural gas (CNG), liquefied natural gas (LNG), liquefied hydrogen,3 liquid coal, and liquid hydrocarbon from biomass.
• Other-Fuel Exploration & Development Expensing (annual subsidy: $342 million) - IRC Section 617. Identical provisions as applied to oil and gas (above). Including, for example, the costs of surface stripping, and construction of shafts and tunnels.
• Other-Fuel Excess of Percentage over Cost Depletion (annual subsidy: $323 million)- IRC Section 613. Taxpayers may deduct 10 percent of gross income from coal production.
• Credit for Clean Coal Investment ($186 million)- IRC Sections 48A and 48B. Available for 20 percent of the basis of integrated gasification combined cycle property and 15 percent of the basis for other advanced coal-based generation technologies.
• Special Rules for Mining Reclamation Reserves ($159) - IRC Section 468. This deduction is available for early payments into reserve trusts, with eligibility determined by the Surface Mining Control and Reclamation Act and the Solid Waste Management Act. The amounts attributable to mines rather than solid-waste facilities are conservatively assumed to be one-half of the total.
• The Low Income Home Energy Assistance Program ($6.3 billion) - The main structure of the program is to provide low-income households with the means to make their utility payments, the vast majority of which is energy generated by fossil fuels. The U.S. Department of Health and Human Services has tabulated the percentage of households using fossil versus non-fossil heating fuels in 2001, and ELI used the percentage as a proxy for fossil versus non-fossil expenditures for 2002-2008.
• Black Lung Disability Trust Fund ($1 billion) - pays health benefits to coal miners afflicted with pneumoconiosis, a long-term degenerative disease from constant inhalation of coal dust, also known as “black lung.” Created in 1978, it is funded through an excise tax on coal to support a trust fund covering health costs of affected workers, however the tax is not sufficient to cover all costs, and the BLDTF was given “indefinite authority to borrow” from the U.S. General Fund. By the end of FY 2008, the BLDTF had accrued nearly $13 billion in debt. In 2008, Congress partially “bailed out” the BLDTF, which ELI tabulated as a subsidy to coal.

External Costs

In economics, an external cost or externality is a negative effect of an economic activity on a third party. When coal is mined and used to generate power, external costs include the impacts of water pollution, solid waste streams, and especially air pollution on human health, and the long-term damage to natural systems and human society caused by global warming. These can end up as federal subsidies if taxpayers have to pay the costs of these harms, such as health care expenses and environmental clean-up, as well as the loss or degradation of valuable ecosystem and community services.

External costs of coal mining and power generation include the following:

• Reduction in life expectancy (particulates, sulfur dioxide, ozone, heavy metal, benzene, radionuclides, etc.)
• Respiratory hospital admissions (particulates, ozone, sulfur dioxide)
• Congrestive heart failure (particulates and carbon monoxide)
• Non-fatal cancer, osteroporosia, ataxia, renal dysfunction (benzene, radionuclines, heavy metal, etc.)
• Chronic bronchitis, asthma attacks, etc. (particulates, ozone)
• Loss of IQ (mercury)
• Degradation and soiling of buildings (sulfur dioxide, acid deposition, particulates)
• Reduction of crop yields (NOx, sulfur dioxide, ozone, acid deposition); some emissions may also have a fertilizing effect (nitrogen and sulfur deposition)
• Global warming (carbon dioxide, methane, nitrous oxide)
• Ecosystem loss and degradation

2009 National Research Council Report on External Costs

In 2009 the National Research Council released a report on “external effects” caused by various energy sources over their entire life cycle, from extraction to production to use and emissions, effects not factored into the market cost of the fuels. The report Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use was released in October 2009. Requested by Congress, the report was sponsored by the U.S. Department of the Treasury, National Academy of Sciences, National Academy of Engineering, Institute of Medicine, and National Research Council make up the National Academies. Putting together a diverse committee of experts including scientists, economists, and geologists, the committee estimated the use of fossil fuels had a hidden cost to the U.S. public of $120 billion in 2005, a number that reflects primarily health damages from air pollution associated with electricity generation and motor vehicle transportation. The estimate was derived from monetizing the damage of major air pollutants -- sulfur dioxide, nitrogen oxides, ozone, and particulate matter – on human health, grain crops and timber yields, buildings, and recreation.

The figure does not include damages from climate change, harm to ecosystems, effects of some air pollutants such as mercury, and risks to national security, which the report examines but does not monetize.

The committee also separately derived a range of values for damages from climate change, and found that each ton of CO2 emissions will be far worse in 2030 than now: “even if the total amount of annual emissions remains steady, the damages caused by each ton would increase 50 percent to 80 percent.”

External Costs of Coal Plants

According to the National Research Council report, in 2005 the total annual external damages from sulfur dioxide, nitrogen oxides, and particulate matter created by burning coal at 406 coal-fired power plants (which produce 95 percent of the nation's coal-generated electricity), were about $62 billion. A relatively small number of plants -- 10 percent of the total number -- accounted for 43 percent of the damages. Further, coal-fired power plants are the single largest source of greenhouse gases in the U.S., emitting on average about a ton of CO2 per megawatt-hour of electricity produced, creating climate-related monetary damages range from 0.1 cents to 10 cents per kilowatt-hour, based on modeling studies.

The report also found that burning natural gas generated far less damage than coal, although still significant: a sample of 498 natural gas fueled plants (71 percent of gas-generated electricity) produced $740 million in total nonclimate damages in 2005. The life-cycle damages of wind power, which produces just over 1 percent of U.S. electricity, were found to be small when compared with those from coal and natural gas.

The Clean Coal Power Initiative

According to the U.S. Department of Energy:

"The Clean Coal Power Initiative (CCPI) is a 10-year, $2 billion program designed to support the Clean Coal Technology Roadmap milestones with the government providing up to 50 percent of the cost of demonstrating a range of promising technologies. CCPI is implemented through a series of five solicitations over the 10-year period, two of which have already been issued and selections made. CCPI provides the means to demonstrate those technologies proven through R&D to have commercial potential. Demonstrations are at a commercial scale in actual operating environments, which is essential to moving them to the threshold of commercialization."

As of April, 2008, 8 projects were active and 4 had been withdrawn.

According Department of Energy Fact Sheet, the multi-year Clean Coal Power Initiative (CCPI), "is driven by private-sector-proposed projects in response to a government solicitation. Potential applicants include technology developers, service corporations, R&D firms, energy producers, software developers, academia, and other interested parties. The private sector cost share must be at least 50 percent. Funding is awarded to applicants, selected as a result of these open competitions, who can rapidly move promising new concepts to a point where private-sector decisions on deployment can be made."

Round I participants:

• Great River Energy, Underwood, ND - Increasing Power Plant Efficiency–Lignite Fuel Enhancement
• NeuCo, Inc., Boston, MA - Demonstration of Integrated Optimization Software at the Baldwin Energy Complex
• University of Kentucky Research Foundation, Lexington, KY - Advanced Multi-Product Coal Utilization By-Product Processing Plant
• WMPI PTY., LLC, Gilberton, PA - Gilberton Coal-to-Clean Fuels and Power Co-Production Project
• Western Greenbrier Co-Generation, LLC, Lewisburg, WV - Western Greenbrier Co-Production Demonstration Project
• Wisconsin Electric Power Co., Milwaukee, WI - TOXECON Retrofit for Mercury and Multi-Pollutant Control on Three 90 MW Coal-Fired Boilers

Round II participants:

• Excelsior Energy, Inc., Minnetonka, MN - Mesaba Energy Project
• Pegasus Technologies, Incorporated, Chardon, OH - Mercury Specie and Multi-Pollutant Control
• Southern Company Services, Birmingham, AL - Demonstration of a 285-MW Coal-Based Transport Gasifier

Articles and Resources

Sources

Related SourceWatch Articles

• Estimating U.S. Government Subsidies to Energy Sources 2002-2008
• United States and coal
• Global warming
• State coal subsidies
• Health effects of coal
• Climate impacts of coal plants
• Mercury and coal
• Sulfur dioxide and coal
• Global warming
• Environmental impacts of coal
• Air pollution from coal-fired power plants
• Coal waste
• Coal sludge
• Fly ash
• Heavy metals and coal
• United States and coal

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