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Transcript of Coal. Prospects in the Twenty-First Century. Exhaustion Trumped by Global Warming.pdf
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air pollution policy.
Climate change The concern for the undesirable effects of
Environmental impact statement Appraisals of the
environmental effects of major policy decisions;
interpretation led to an expansive definition of major.
Exhaustion The using up of a natural resource.
Externality The effect of individual actions on others rather
experts knew that individuals would regret their unregulated
decisions.
Nitrogen oxides Chemicals form as the result of
of revenues - or a specific amount per unit of output.
Sulfur oxides Chemical released during combustion
because of the sulfur contained in the fuel.
Transaction costs Term for the indirect costs of information
and implementation associatedwith buying and selling goods.
Enthan the conscious participants.
Greenhouse gas emissions The various gases that
contribute to increased carbon dioxide concentrations.
The Department of Interior The US cabinet agency with
land management responsibilities including administering
most of the US governments extensive land holdings.Command and control Derisive term for policies that
tightly define rules to comply with environmental
regulations.
Cross-state pollution Harm to air quality in one
state from migration of pollutants emanating from
another state.
Depletion The using up of a natural resource.
combustion.
Progressive movement Term for those in the United States
who argued that the rise of learned professions created the
expertise to allow successful expansion of governmental
control of the economy.
Royalty A charge by public or private landowners on the
production of a commodity. It can be ad valorum - a percentrising carbon dioxide concentration in the atmosphere.Carbon dioxide A component of the atmosphere essential
to all forms of life on earth but which it is feared could cause
undesirable environmental impacts if its concentration
greatly rises.
Clean Air Act The US law that with its amendment governs
Organization for Economic Cooperation and Development
(OECD). All IEA members are OECD members, but some
OECD members initially did not join IEA.
Libertarian paternalism A term devised by Richard Thaler
and Cass Sunstein to justify intervention in cases in whichemission rights to spare. studies for industrial countries. It is assoNON-RENEWABLE FOSSIL/NUCLEAR/ELECTRICITYMARKETS
ContentsCoal: Prospects in the Twenty-First Century: Exhaustion Trumped by Global Warming?Economics of Peak OilGreen Microaccounting for Oil ExtractionModeling Reserve Growth in Natural Gas FieldsNatural Gas NetworksPrice Dynamics in Domestic Energy Markets
Coal: Prospects in the Twenty-First Century: Exhaustion Trumpedby Global Warming?RL Gordon, The Pennsylvania State University, Pennsylvania, PA, USA
2013 Elsevier Inc. All rights reserved.
GlossaryBest available control technology A term to describe
policies to require regulators to define and mandate use of
the technically best emission control technology.
Cap-and-trade A policy to set limits on emissions from a
given facility that allows selling the excess of the limit over
actual emissions and buying reductions from sources with
Intergovernmental Panel on Climate Change A UN body
of scientists engaged in the appraisal of climate change
dangers.
Internalities Daniel Spulbers term for policies that regulate
the effects of economic action on the direct participants.
International Energy Agency (IEA) An organization created
in the 1970s to effect cooperation among and supporting
ciated with thecyclopedia of Energy, Natural Resource and Environmental Economics http://dx.doi.org/10.1016/B978-0-12-375067-9.00121-2 137
-
dated efforts to allay exhaustion fears. (The main example is
John Holdrens contribution to the intemperate attack on
Bjrn Lomborgs The Skeptical Environmentalist in the January
20
ch
re
Table 1 shows the levels, changes, and percent increases for
the leading coal consumers. The overriding situation then is
that a small number of countries account for the bulk of world
s
n
y
138 Non-Renewable Fossil/Nuclear/Electricity Markets | Coal: Prospects in the Twenty-First Century02 Scientific American.) This change in outlook justifies the
apters shift of focus from the inappropriateness of optimism
garding coal to the implications of actual and proposed
coal consumption. The newest environmental thrust conflict
greatly with the sharp rise of coal use in China and India. I
particular, over the 19652010 period, Chinas massivelUS Energy Information Administration An independent
component of the Department of Energy charged with
producing energy data, energy forecasts, and policy studies.
The coal sector has undergone extensive transformation
throughout its history, which extends over more than two
centuries. These changes have massively altered the size and
composition of coal use and changed the location of both its
production and use. The principal determinant has been the
rise of massive supplies of petroleum and natural gas, two fuels
with numerous advantages over coal in transportation, conver-
sion, and use. As a result, the use of coal as the worlds main
general-use fossil fuel has to an increasing concentration into
electric utility use. China and, to a lesser extent, India have
emerged as major producers and consumers. Western Europe
and the former Soviet Union have greatly decreased their coal
production and use.
During this transition, the public-policy evaluation of coal
has severely reversed focus. Particularly in the 1970s, coal was
treated as the potential savior of an oil- and natural gas-
depleted world. Several countries, most notably Great Britain
and Germany, frittered away billions, at least nominally, in the
vain hope that domestic coal would be an important compo-
nent of the rescue from depletion. While this folly probably
reflected the standard inability of governments to abandon bad
policies, the coal ambitions elsewhere reflected a genuine fear
of oil and gas depletion. This enthusiasm peaked with the
Carter administrations wildly unsuccessful creation of a Syn-
thetic Fuels Corporation to subsidize development of alterna-
tive fuels with stress on the gasification and liquefaction of coal.
In any case, that argument is in a shambles. The threat of
immediate depletion has vanished, although the prophets of
doom about oil persist. Extensive ongoing work claims an
impending peak in world oil production. To top these numer-
ous alarmist efforts, a website makes available the classic work
of M. King Hubbert. The availability of cheaper-to-extract coal
in several other countries always made the preservation of old
industries a mistake, and the fears of depletion were, and
continue to be, based on a misunderstanding of the underlying
economics. Oil and gas were simply so much more available
than feared and easier to employ than coal. This reality has
now largely sunk in.
More critically, the long campaign to lessen the environ-
mental impacts of fossil fuel use has extended to concerns over
the greenhouse gases emitted from combustion causing a
harmful increase in atmospheric temperatures, necessitating
radical changes in the way energy is provided. This stress on
climate change has also led to a strong reversal of concerns over
resource depletion. Instead of worrying about fossil fuel avail-
ability, much advocacy of rapid moves away from fossil fuel
prevails, at least among environmentalists, who treat as out-US Environmental Protection Agency The agency charged
with promulgating and enforcing US environmental
policies.
policies for controlling the environmental aspects of coal
utilization.
It is elementary economics that the role of coal and its
alteration reflect the changing comparative costs. Part of the
cost consideration is that the side effect (or in economic
terminology, externality) aspects of coal production and use
are deemed serious enough to warrant extensive regulation.
This has produced intercession that goes far beyond the con-
ventional vision of externalities. At the outer extreme, it was felt
that private operation was so inept that coal industries should
be nationalized. This occurred not only in the communist
states devoted to as much as possible of government control,
but also in social democratic states such as Great Britain and
France that selectively nationalized industries deemed impor-
tant. (While Britain reprivatized these industries, France did
not. It did, however, close its coal industry.)
Clear environmental pollution externalities arise from the
mining, transformation, and use of coal. There is considerable
uncertainty, however, regarding the nature and effects of such
pollution. Concerns have escalated over time. The initial stress
was on the highly visible emission of ash. Attention then
turned to the health effects of the ash and sulfur contained in
coal and released during burning. This extended to the acid
rain effects on streams and forests of both the sulfur dioxides
from the sulfur in coal and the nitrogen oxides produced by
any combustion process. At one point, the trace amounts of
mercury emitted from coal emerged as an issue. More precisely,
the 1990 Clean Air Act Amendments included a long list of
toxic chemicals including mercury whose pollution effects
were deemed serious enough to warrant regulation, and over
time, mercury emerged as a prime concern.
However, the potential coup de grace is the widely publi-
cized concern that the carbon dioxides emitted from fossil fuel
combustion were producing a worldwide harmful rise in sur-
face temperature. Since coal emits more carbon dioxide per
unit of input than other fossil fuels, restriction of coal use (or at
least its carbon dioxide emissions) is particularly critical to
policies to reduce carbon dioxide emissions.
In the United States, a further more immediate complica-
tion is the rise of formidable competition from natural gas.
For many decades, natural gas grew in importance in electric
power as the addition of natural gas-fired plants proved at-
tractive because of low capital costs, stable natural gas prices,
faster construction time, and lesser regulatory barriers. The
development of technology to extract at dramatically reduced
costs gas trapped in shale has increased the competition
from gas.
-
Pe
65
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Non-Renewable Fossil/Nuclear/Electricity Markets | Coal: Prospects in the Twenty-First Century 139increased coal use caused its share in world coal consumption
to rise from 8% to 48%; this is perhaps an experience too good
to be true. Indias consumption share went from 2.5% to 7.8%.
(Here, as with the other data cited, the starting dates are deter-
mined by data availability.) Even so, India is a poor third. In
both cases, indigenous production met most of the consump-
tion although imports also arose. The effect is a further radical
skewing of the distribution of coal production and use. The
underlying BP data show that a critical influence on these high
shares of coal usage is the high coal dependence of China and
India. Both account for far higher shares in coal use than in
total energy use, causing the larger cumulative share in coal use
of the countries shown here.
The United States at 15% of 2010 consumption and pro-
duction fell to a distant second-place participant in coal. The
Table 1 Coal: consumption
Million tons oil equivalent 1965 1990 2010
19
China 112.3 525.3 1713.5 7United States 291.8 483.1 524.6 20India 35.5 95.5 277.6 2Japan 43.6 76.0 123.7 3Russian Federation n/a 180.6 93.8South Africa 24.7 66.4 88.7 1Germany 163.5 129.6 76.5 11South Korea 5.0 24.4 76.0 0Poland 59.5 80.2 54.0 4Australia 16.0 36.5 43.4 1Taiwan 3.0 11.0 40.3 0Indonesia 0.1 4.0 39.4 0Ukraine n/a 74.8 36.4Kazakhstan n/a 40.2 36.1Turkey 3.7 16.8 34.4 0United Kingdom 117.4 64.9 31.2 8
Source: BP Statistical Review of World Energy, June 2011.United Kingdom, the birthplace of the modern coal industry,
was selected as the cutoff country because of its striking change
in coal use.
Another striking feature is the decline in the levels of coal
production and use in major European countries including
the former Soviet Union, Great Britain, Germany, and
France. The last three substantially reduced coal production.
Indeed, France and Japan eliminated coal production. Japan
thus has the unique position of a large consumer of coal
that is obtained entirely from imports (principally from
Australia and Indonesia). Taiwan also has ceased coal pro-
duction, and South Korean output has fallen to about 2
million tons.
Another feature of the change is the growing role of elec-
tricity generation in coal use. The US alteration is particularly
dramatic. The share of US electricity generation in coal con-
sumption has risen from 17% in 1949 to 92% in 2010. How-
ever, the share of coal in energy use for electricity was 48% in
2010. This was a decline from the 54% peak reached in 1997.
The natural gas share went from 12% to 20% over the same
period. The roles of other sources changed in many different
ways. Despite the absence of new nuclear capacity, the nuclearshare rose slightly to 21%. The oil and hydro shares declined,
and the only unconventional source to gain ground was wind
(from 0.1% to 2.33%).
In 2009, electricity accounted for 52% of coal use in China,
but this produced 90% of the electricity; the corresponding
Indian shares were 80% and 70%.
Production is similarly skewed, but because of wide differ-
ences in involvement in international trade, the leaders after
China, the United States, and India are quite different. In the
world coal industry, a few producers primarily for export have
emerged. The dominant cases are Australia and Indonesia.
They rank fourth and fifth respectively as producers. (The
rankings differ by source. BP shows India producing more
than Australia in tons of physical coal but less on a heat
content basis. However, EIAs heat content figures show India
rcent of world (%) Percent increase19652010 (%)
Cumulative percentof world (%)
1990 2010
23.7 48.2 1425.321.8 14.8 79.8 62.94.3 7.8 680.9 70.73.4 3.5 183.8 74.28.1 2.6 76.93.0 2.5 259.8 79.45.8 2.2 53.2 81.51.1 2.1 1435.0 83.73.6 1.5 9.3 85.21.6 1.2 171.1 86.40.5 1.1 1249.3 87.50.2 1.1 30411.6 88.63.4 1.0 89.71.8 1.0 90.70.8 1.0 836.7 91.62.9 0.9 73.5 92.5as a somewhat larger producer than Australia.) Conversely,
Japan, Germany, South Korea, and the United Kingdom
with sharply declining coal production rank much higher as
consumers than as producers.
Within the United States, the location of production has
altered profoundly. In particular, Wyoming has risen from 1%
or less of output from 1946 to 1970 to 41% percent in 2010.
The leading eastern mining states West Virginia, Kentucky,
Pennsylvania, Illinois, Ohio, and Virginia display declines in
amounts for varying time periods and varying magnitudes too
intricate to present here. The change involves both the rise of
coal-fired generation west of the Mississippi and displacement
of Middle Western coal not only from the West North Central
States, but also in coal-producing states, particularly Illinois.
Another element of US coal development is the turnover in
company ownership. Basically, the industry historically was
comprised of companies for which coal was their only busi-
ness. In the 1970s, oil companies became heavily involved,
mainly by creating new coal operations but sometimes by
buying existing ones. Then the oil companies retreated, but
foreign mineral companies entered. Most notable were the
multinational Rio Tinto; RAG, the sole German producer of
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regularly generates massive documents presenting both the
140 Non-Renewable Fossil/Nuclear/Electricity Markets | Coal: Prospects in the Twenty-First Centurybroad case for its interventions and that for specific decisions.
Both skeptics and affected industries offer responses.
As a result, applied environmental economics suffers from
an ill-resolved conflict. The relevant literature deals poorly, if at
all, with the implications of inept implementation. The litera-
ture unanimously recognizes that the absurdly detailed pro-
cedures adopted to cure perceived environmental dangers are
monstrously inefficient. These are routinely denounced as
command and control. Some concern also exists over thebituminous; and Rheinbraun, the leading German lignite
producer. All of the last three exited. Thus, in 2012, most
leading US coal companies are US domiciled publicly traded
operations producing only coal. The exceptions include several
untraded firms.
In contrast, a quartet of firms has emerged to dominate coal
production in Australia, South Africa, and Colombia. These are
the long extant BHP-Billiton, Rio Tinto, and Anglo-American
and the newer Xstrata.
Coase, Coal, and Coal Regulation
Coal-related intervention unremarkably follows patterns en-
demic to modern government policy. The enabling legislation
is characteristically complex, and the convolution has grown
over time. A further problem is that these laws routinely leave
details for the relevant executive agency to complete. That
implementation often proves protracted. Moreover, this in-
completeness and imprecision of the laws leaves them open
to lawsuits that can and do produce long delays in implemen-
tation and then lead to orders to expand the scope of the
controls.
A vast literature exists on how this resulted from the Pro-
gressive movement with its belief that good government would
flow from delegation of operation to boards of impartial
experts. Many observers argue that this vision was fatally
flawed. The core defect is the invalidity of the underlying
faith in the existence of expertise that could soundly and dis-
passionately design controls of complex systems. That com-
plexity precluded centralized determination of optimal results.
Second, the faith in insulated implementation proved a delu-
sion; political pressures still dominated. Third, often the wrong
expertise was employed; attorneys and other generalists, rather
than specialists in the areas regulated, took charge. Even when
such specialists were utilized, they could not match the quality
and quantity of their counterparts in the industries being
regulated.
The Progressive thrust, in turn, was an effort to use the
emergence ofmodern social science to justify the long-standing
pressures to supervise market economies. The left proposed
socialism better to enrich the masses. The right wanted the
aristocracy to continue to achieve glory rather than ceding to
a nation of shopkeepers.
These broad doubts necessarily apply to the massive dele-
gation involved in pollution control. Advocates of pollution
abatement tacitly argue that the US Environmental Protection
Agency (EPA), in the face of the complexities, still produces net
environmental improvement. Critics see a mindless effort ever
to increase controls without regard for the costs involved. EPAtendency to regulate in areas where the damages are too
small to justify action.
However, the standard tacit reaction is that this is better
than nothing. As is so often the case in many policy areas, this
ignores the much cited, but inadequately applied, work of
Ronald Coase. (Many reprints are available of that article,
and hundreds of commentaries exist, none satisfactory as a
guide to the others.) The key points for appraising environ-
mental policy start with his recognition that real economies are
not frictionless and action involves implementation (transac-
tion) costs. When such transaction costs are considered, the
total costs of removal of apparent market imperfections may
exceed the benefits. Governments can pool resources to reduce
such transaction costs but so can private alliances. It is unclear
first whether either can attain total costs less than benefits.
Moreover, given the limitations of government, even if a net
benefit arises, the superiority of government action is not
certain. The possibility that actual environmental policies fail
to meet the Coase criteria is inadequately considered. The
patchwork of programs designed to offset the supposed ill
effects of the production and use of coal are prime examples.
On the production side, deficiencies arise with leasing of the
extensive coal resources owned by the US government, the
regulation of mine health and safety, and the control of recla-
mation of land disturbed by coal mining.
The rationales for intervention range from the dubious to
the clear with some of the most critical involving imperfectly
understood problems. The most questionable interventions
relate to second-guessing market decisions particularly about
the terms and conditions of work in coal mines. This type of
intervention into market decisions has received remarkably
little analytic attention. A key exception is Daniel Spulbers
discussion of internalities, essentially intervention to offset
supposed limited information. Spulber concludes information
provision is preferable, but the long tradition in intervention,
now termed libertarian paternalism, argues otherwise.
The next step of controlling the surface-land effects of coal
mining is at the edge of relevance. Both the internality of effect
on the surface-land owner and possible external effects on
others are involved. In each case, enormously complicated
enabling legislation and creation of a new specialized enforce-
ment agency were involved.
US federal coal leasing, in retrospect, proved an area of
fruitless intervention. A long frustrating process of rationaliz-
ing policy turned out both ineffective and irrelevant. A flurry of
coal leasing in the 1960s without corresponding immediate
production surges produced a 1971 moratorium on coal leas-
ing. Efforts in the Carter administration were stymied in 1977
by a successful suit objecting to the adequacy of the environ-
mental impact statement on the program. Completion of
compliance was so protracted that leasing did not resume
until 1981.
However, the first major sale after resumption was criticized
for its deficiencies. The initial concern was over a reputed leak
of data, but that allegation has never been substantiated. At-
tention turned to questions of administration. The Department
of Interior decided to produce estimates of what would be
adequate bids for the leases. However, data were available
only on one recent sale. Interior employed and modified nec-
essarily ad hoc adjustment measures to cover the differences
-
Non-Renewable Fossil/Nuclear/Electricity Markets | Coal: Prospects in the Twenty-First Century 141between that prior tract and the lands to be leased. Such
adjustments were unavoidably subject to and, therefore, were
subjected to second-guessing. The situation was aggravated by
a hasty revision of the estimates.
The effect was a series of predictable responses. First, a study
commission was appointed to review the situation; I was a
member. Second, that commission correctly found the process
sloppy and predictably but unwisely advocated better proce-
dures. Third, Interior dutifully produced extensive documents
setting up absurdly complex procedures to guide future leasing.
Fourth, leasing remained limited during the following three
decades. The prior rush to lease had provided enough access to
permit the extensive expansion that occurred after the morato-
rium, led by that in Wyoming noted above. Thus, everyones
premises proved false. The initial leasing was to meet the de-
mands that emerged, and development followed. The stated
fixation among politicians for impeccable appraisal methods
clearly unwisely makes seeking assurance for the highest pos-
sible payments for access excessively dominant over providing
the maximum possible market availability of economically
viable coal resources. The demands for extensive appraisal,
moreover, are unrealistic.
Even so, the coal leasing fiasco is simply a further example
of the dysfunction of US government land ownership. That
land is largely leased for routine commercial use. The proce-
dures are set up to favor particular uses and thus preclude
transfer to more efficient options. The limited-duration ap-
proach taken in coal, oil, and natural gas leasing is but one of
many prime examples. Others include the favoritism toward
grazing on western land, the inability to produce the promised
efficiency gains by creating national forests, and the creation of
many Park Service sites devoted to obscure people and events.
Buyers with a mineral extraction goal care only about prospects
during the lease life; those who believe that permanent non-
extraction is preferable need to offset these offers to exploit
every time a lease is offered and reoffered.
The system also tries to do too much. A key is that the
concept of optimal lease timing is a chimera. Market forces
are such that if it is not efficient immediately to develop a lease,
the lease simply will be held until the best time to start.
Ofcourse, lease length limits will prevent optimal holding
when the best starting date is after the lease expires. The only
efficiency problem in timing is that the mineral is not leased
initially or after forfeiture early enough for extraction to occur
at the optimum point.
The stress on percentage royalties and securing initial pay-
ments equal to the net value of the lease produces further
administrative nightmares. Given the royalty requirement, the
remaining net is by definition greatly reduced. The total value
is difficult enough to predict; the reduced amount after deduc-
ing royalties is necessarily even tougher to estimate. Royalties
have the textbook defect of discouraging otherwise profitable
output. A further practical problem is that collection requires at
least output monitoring. In addition, locational and output
quality differences often complicate calculation of the correct
price of that output.
However, the key problem policy area is the five-decade
long federal effort to control pollution from the burning of
coal. The first federal pollution law was the 1955 Air Pollution
Control Act; it concentrated on research. Many modificationsarose particularly in 1963, 1970, 1977, and 1990. (The 1963
revisions were so extensive that some sources treat the changes
as the first meaningful law.) The program has involved multi-
ple, overlapping governing principles. The key organizational
problems are that implementation is left to EPA, and its de-
cisions can be and have been subjected to court reviews that at
a minimum slow and in many cases disapprove of the pro-
posed execution. Among the consequences of these problems,
several major changes in environmental law implementation
were made in 2011 twenty years after the last major changes
in the law. Basically, these new actions used several different
provisions of the acts to tighten emission limits. A more fun-
damental difficulty is that of satisfactorily quantifying the costs
and benefits of action.
The initial main distinction was between criteria for the air
quality in each state and emission limits for specific sources.
Both concepts became increasingly convoluted over time. The
first regional distinction was simply between noncompliance
areas where the pollution levels were not met and those areas
with better than required air quality. The latter ultimately were
required to prevent significant deterioration of air quality a
concept so vague that quantitative criteria for allowable change
had to be legislated. An additional regional goal of preserving
visibility near national parks also arose.
Emission limits began with new-source performance stan-
dards. These were initially set as simply maximum rates of
emission from specific types of facilities. The 1977 amend-
ments shifted to requiring best available control technology
(BACT). It became mandatory to comply by employing
scrubbers devices to capture sulfur oxide emissions after
burning. (Interestingly, the prime critics of the rule are advo-
cates of active intervention.) The key difference from prior
requirements was giving no credit for shifting to coals naturally
lower in sulfur content. In principle, this could lead to in-
creases in emissions. The maximum feasible pollution reduc-
tion scrubbing high-sulfur coal could produce higher
discharges than from burning a low-sulfur coal without scrub-
bing. The amendments compounded the problem by adding a
provision allowing requirements to use locally produced coals;
that provision was never implemented.
As is routinely noted in the applicable economics literature,
the new-source approach has the intrinsic drawback of encour-
aging maintenance of old units. Thus, an irony of 2011 efforts
to tighten standards on old plants is that one justification is
that the plants had been exempt from the pollution controls
applied to new plants. This exemption, to the extent it existed,
was conscious policy, and thus, it is questionable to use back-
door measures to reverse legislative decisions, no matter how
ill advised. Moreover, these plants were already subject to
indirect control through state implementation plans and direct
control through other measures. BACT and the local-coal re-
quirement were obvious but futile efforts to thwart the ten-
dency to adopt low-sulfur western coal as a compliance
strategy. A further issue that arose is determining how much
plant modification constitutes development of a new source.
The tighter the criteria, the less attractive is upgrading old
plants. Predictably, EPA, nevertheless, opted for rules that
subjected most improved units to new-source rules.
The 1990 amendments added two major complications.
The first and most immediately relevant was imposing
-
fits from action mainly by using a far lower discount rate than
142 Non-Renewable Fossil/Nuclear/Electricity Markets | Coal: Prospects in the Twenty-First Centuryemission limits on high-polluting units of electric power
plants; the law listed the affected units. This extreme
command-and-control provision was mitigated with imple-
mentation clauses allowing the affected companies to select
compliance methods including reducing pollution at other
units or paying outsiders to reduce emissions. This approach
was epitomized as cap and trade. Environmental economists
longing for some recognition of the principles of efficient
emission control avidly examined the implementation and
were delighted by its efficacy.
This ignores two serious problems. Most obviously, the
enthusiasm for market implementation ignored the heavy-
handed nature of the initial targeting. Second, the law was
rushed through before completion of a national acid rain
study. When that study appeared, it concluded that the dam-
ages to forests and lakes that were the nominal basis for the
controls were far smaller than previously claimed. At best, the
remaining rationale for action was that further reduction in
health damages was produced.
The second area of toxic chemicals proved difficult to re-
solve. In late 2011, EPA issued its latest effort to set compliance
rules. These rules were justified almost entirely (all but a billion
dollars of the $33$89 billion cumulative benefits on various
assumptions) by reduction in particulate-matter emissions.
Nominal benefit was attributed specifically to reducing mer-
cury pollution or actually improving visibility. An obvious
issue is that the law covered a large list of specific chemicals
while particulates were always an EPA concern. This discon-
nection produced extensive criticism of this use of a policy
directed at one specific problem to further control of a differ-
ent, long heavily regulated pollutant. Of course, toxic chemi-
cals are a type of particulate. This leaves open why special
controls should be added on top of general limits. This partic-
ular action inspired an extensive counterattack by those
affected, and extended litigation is expected.
Another 2011 regulation dealt with cross-state pollution.
These rules required reduction in sulfur dioxide and nitrogen
oxide emissions in the eastern United States because these
emissions lead to concentrations of ozone and fine particles
that produce violation in other states of the air quality criteria
for those pollutants.
Still another 2011 regulation presented the latest effort to
enforce the visibility requirements. Again, the solution was
increasing limits on already controlled pollutants.
While these rules had very different bases, the chosen ratio-
nales of all three were identical substantial health benefits.
The minimum concern is that so many routes are open to
dealing with the same problem of seemingly dangerous emis-
sions. In the toxic material and visibility cases, the claimed
health benefits, as noted, arise from controlling pollutants so
long regulated that adequate control should already exist. An
immediate further difficulty is the slowness with which these
rules are formulated, a tardiness to which extended litigation is
a major contributor. The situation is aggravated by the readi-
ness of judges to require changes.
Further regulation ruled that mountaintop coal mining
caused water pollution under the Clean Water Act. Such de-
terminations are a vexing aspect of that law; the application of
the law to puddles often produces news reports (and extensive
more formal criticism).most other modelers. (This difference produced strong criti-
cism from many of these other modelers.) Richard Tols 2009
survey of the literature explicitly concludes all the economic
modeling is unsatisfactory. Thus, caution is appropriate.
On top of these problems, designing a sensible implemen-
tation policy proved infeasible. Another key aspect of Coases
analysis is that either a tax on damage creation or a subsidy of
damage avoidance can efficiently produce control of social costAt a minimum, the experience shows why emissions taxes
are far preferable to command and control. What remains
open is whether in a world in which action depends on com-
plex command and control, multiple concerns of wildly vary-
ing merit, delegation of implementation to EPA, and ease of
judicial challenge, the policies actually yield benefits in excess
of their costs. The EPA valuation estimates are based on its own
mathematical model whose bases are not clearly delineated.
The Coase Conundrum and Global Warming
Global warming is yet another environmental issue in which
moral indignation tries to silence technical debate. Proponents
of action assert that the disasters resulting from failing to
control are so severe that further analysis is irresponsible. The
advocates of additional study stress the defects of the support-
ing research. Their implicit moral argument that massive action
against an imaginary problem would divert resources from
reducing world poverty is mildly stated. In any case, given the
moral arguments supporting both sides, only careful analysis
can resolve the debate.
Similarly, the source of research funding is never a valid way
to evaluate the reliability of results. The government does not
allocate all its research funds on the sole basis of merit. Even if
private firms seek to advance their interests, their concerns are
not automatically invalid. Consultants are hired because their
prior independently formed views support the sponsor, public
as well as private. Thus, denunciation of research sponsorship
is invariably a way to evade making a reasonable response to
the criticism. Yet, it is perennial. Three decades ago, my mem-
bership on the coal leasing commission was denounced be-
cause of one small grant from Exxon. The part available on
Amazon of Penn State climate researcher Michael Manns book
defending his questionable statistical analysis of global tem-
perature change uses the fuel industry support calumny early
and often.
The vast literature suggests that the physical science and
economic impact research is far less settled than proponents
insist. Certainly, the physical science dissents involve respect-
able academics. More critically, physical science is only the first
part of the argument. The costs, benefits, and feasibility of
action must also be considered, and the deficiencies are vast.
The economic modeling to evaluate the payoff is clearly and
necessarily inadequate. The task of analyzing the next century
cannot succeed given the inherent limitation of economic
modeling particularly the impossibility of foreseeing what
new things will emerge. Simply observing the work makes clear
that the results, as is so often the case in economic modeling,
are extremely sensitive to assumptions. The work by the British
research team headed by Nicholas Stern produced large bene-
-
Non-Renewable Fossil/Nuclear/Electricity Markets | Coal: Prospects in the Twenty-First Century 143and no clear a priori basis exists for preferring taxes over
subsidy. (The essence of the enormous literature trying to
critique these findings is that the proper tax or subsidy is
dauntingly difficult to design.) The debate over how to respond
to the threat of global warming is a dramatic illustration of
Coases policy choice argument.
A subsequent prices versus quantity debate examined the
potential equivalence between an optimum tax and setting the
optimum level of compliance as a quota. Curiously, this liter-
ature concentrated on which method was best given different
areas of uncertainty. Conceptually, this overlooked that given
multiple different uncertainties all with unknown impacts, a
sensible choice was unclear. A more critical, probably fatal
neglect was of the practical experience with tariffs versus quotas
in international trade. At a minimum, unseemly debates arise
about to whom to award the windfalls from quotas; often,
rampant bribery for access arose. This alone suffices to make
charges clearly preferable to cap and trade.
As shown, three nations dominate coal use. Given the high
rate of greenhouse gas emissions from coal, these states must
undertake substantial reduction or control of coal use. A basic
concern is whether it is fair for countries emerging from pov-
erty to pay for control of emissions made dangerous by the
actions of the already rich. Thus, China and India demand
compensation for their compliance, but rich-country govern-
ments, already facing fiscal stress, have no inclination to pro-
vide such assistance.
This reality dominates the literature on control of climate
change. Proponents of action, perhaps more than opponents,
stress the centrality of getting a control agreement including
China and India. Reductions elsewhere would fail to offset
rises in China and India. In the meantime, the European
Union succeeded, but the United States failed, in implement-
ing a unilateral emissions policy. The 2009 United States fail-
ure is yet another graphic example of the complexities that
plague environmental policies. The US House of Representa-
tive passed a massive bill centering on greenhouse gas control.
The core was setting caps on emissions and devising rules to
allocate quotas within these caps. These were designed initially
to favor those, particularly coal-using electric utilities, most
affected by the caps. However, these grants were to be phased
out. Numerous provisions indirectly to produce emission re-
ductions by favoring nonfossil fuel alternatives supplemented
the direct controls.
The cap-and-trade approach proved doubly problematic.
The blatant political bribery involved in the initial grants pro-
duced a backlash. The ultimate turnover of the income from
permit sales to the federal government involves major public
policy concerns. Optimists hoped that this revenue from a tax
that ideally would enhance, rather than reduce, economic
efficiency would allow reduction of reliance on the highly
distorting existing income tax system. Predictably, doubts
arose about that hypothesis.
This array of provisions proved so unattractive that the US
Senate failed to act on the bill or the various alternatives
offered. A further factor in the decision was a (5-4) decision
by the United States Supreme Court that the Clean Air Act
required EPA to consider regulating any potentially dangerous
emissions. This produced the expected divide. Advocates of
action considered accepting the Supreme Court approval ofaction a desirable route and argued that the environmentally
concerned Obama administration could and would act. Be-
lievers in limited government (and at least one leading advo-
cate of heavy intervention Lawrence Tribe) considered this an
unwarranted expansion of government power.
In any case, efforts are already underway indirectly to lessen
greenhouse gas emissions. Critics suspect that the rash of tigh-
ter regulations just sketched of coal use is itself another round-
about way to control. Most certainly, the massive federal and
state efforts to foster alternative energy clearly are designed as
indirect climate change policy. On 27 April 2012, EPA an-
nounced rules for carbon dioxide emissions from power
plants. These rules state that new coal-fired plants are expected
to employ still totally unproved technologies to sequester
(i.e., store underground) these emissions. The key problem is
that the desirability of the chosen options and the means
adopted to stimulate them are questionable. The goal in elec-
tricity is to make competitive technologies that are centuries
old wind and solar technology. These have not emerged as
important power sources because of severe problems including
the limited number and remoteness of sites at which these
resources can be employed and the stark conflict between the
need of electric power systems for uninterrupted flows and the
irregularity of sunshine and wind.
The various energy bills since the oil price shock of 1973
include numerous efforts by subsidy and tax breaks to improve
the competitiveness of these sources. The results are at best
unimpressive and have led to massive failures. The clearest
defect of these mandates is neglect of the unmanageable scale
of the stated ambitions. The task of radically altering how
electricity is generated is expensive and time-consuming.
Given that the best sites for wind and solar are far from the
locales of existing power plants, the requirements include mas-
sive investment in transmission lines. The variability of the
sources is such that backup (fossil fuel) generation will be
needed.
A further dilemma is that many of the leading proponents
of action on global warming long ago declared that nuclear
energy, the one proven nonfossil energy source that is physi-
cally capable of providing electricity on a large scale, was an
anathema. Thus, the advocates are caught between recanting or
insisting that solar and wind suffice. Examples of both posi-
tions arose. Of course, securing new nuclear capacity by the
government guarantees provided is no better policy than sub-
sidy for any other alternative.
Severe critics of these initiatives observe, correctly, that the
environmental groups seemingly pushing these initiatives also
oppose implementation. Offshore wind farms and transmis-
sion lines for renewable energy in remote locations draw the
same attacks as coal-fired power plants, new natural gas pro-
duction technologies, and oil pipelines.
Economists dealing with this issue tend to oppose these
backdoor choices as further undesirable command and con-
trol. These economists prefer a tax or an emission limit. More-
over, the long unhappy history of quantitative controls, of
which the failed House of Representative bill is but another
reminder of a proven but politically unpopular point, suggests
that a tax is far preferable.
In any case, any policy radical to reduce greenhouse gas
emissions would require massive adjustment by coal
-
At least three sprawling realms of related material exist the
energy prognosis literature, the energy data area, and the
bers. The fuel-specific reports include commentary. These re-
ports are downloadable from libraries that are OECD
144 Non-Renewable Fossil/Nuclear/Electricity Markets | Coal: Prospects in the Twenty-First Centurydepositories, but the underlying computer files must be pur-
chased. The IEA data start with 1960 with at least older mem-
bers and 1971 for nonmembers.environmental policy writing. On the first, see Gordon for
note of the many surveys of overall energy issues that have
appeared. The authors range from governments to freelance
writers. No obvious focal treatments are available on the other
two areas so the basics are sketched here.
At least four sources of worldwide energy data exist, and
they differ radically in coverage, accessibility, and usability. The
United Nations (UN) has long published total production and
consumption data on energy in every country of the world and
at some point added statistics on the end use details. However,
these data are not easily accessible.
The International Energy Agency (IEA) provides both a
four-part collection of energy data and coal-, petroleum-,
natural gas-, and electricity-specific compendia. The energy re-
ports consist of (1) figures in oil equivalent tons for OECD
members, (2) similar figures for nonmembers, (3) statistics in
regular units for members, and (4) similar data for nonmem-consumers. The proposed response of capturing the gases and
storing them underground is still an untested technology. Its
physical feasibility and cost remain to be determined.
Conclusion: Festina Lente
Neither the prior enthusiasm for increasing coal use nor the
current desire to ban coal use is well grounded. The ardor was
based on erroneous views about oil and gas availability. The
pressure to eliminate fossil fuel use is based on physical
science whose very strident promotion should raise doubt,
grossly inadequate economic analyses, and to date insupera-
ble implementation problems. Those who lived through such
prior confident predictions as of famine, overpopulation,
resource depletion, and nuclear power disasters wonder
about the similar confidence about action on global warm-
ing. In the global warming case, the proponents of action
want several countries massively dependent on coal to under-
take the enormous, time-consuming task of coal replacement.
The stress on alternatives that vary radically in availability is a
further problem.
Notes on the Literature and Data on Coal
A profound paradox arises in analysis of coal. The literature
primarily concerned with coal is thin, but the material that
treats aspects of coal treated here is unmanageably large. The
isolated coal policy issues that arise are insignificant compared
to those over oil and natural gas. Examining the leading energy
economics journals (Energy Policy, The Energy Journal, and
Energy Economics) unearths little directly treating coal but
much about related issues. Several trade publications exist,
many are expensive, but some free ones are available.BP has a special role in making available without charge
more quickly than others Excel files of its Statistical Review of
World Energy; it contains original unit andoil equivalent tondata
on the total use of the main forms of energy. BPs consumption
and oil production data start with 1965, natural gas production
data with 1970, and coal production data with 1981.
The US energy data system is elaborate but variable in the
form of availability and historical continuity. When the Energy
Information Administration (EIA) was established in 1979, it
assumed the energy data gathering efforts of the US Bureau of
Mines, the Federal Power Commission, and the Federal Energy
Agency. Initially, the result was generation of more numerous,
more formal reports, and making the underlying data avail-
able. Over time, the coverage has diminished, and most reports
are available only as PDF files on the Internet. In the case of
reports covering individual electric companies and plants, da-
tabase files replaced reports. However, data accessibility has
generally increased. In many but not all cases, the PDF versions
are supplemented with Excel spreadsheets. The availability on-
line of PDF and Excel versions differs among reports. EIA main-
tains three data sets showing historical data. First is the still
printed Annual Energy Review with coverage, where possible,
back to 1949. Second, the online only Monthly Energy Review
has monthly data from 1973 on. The State Energy Data System
computer files give by state data on consumption in Btus and
natural units and production from 1960 on and prices and
expenditures from 1980 on. Otherwise, the reports cover only 1
or 2 years, anddata combinationmust bemade.Among the areas
covered are data on individual foreign country consumption and
production; computer files replaced the report on this area.
In some realms, data availability has declined. Two key
cases are federal lands data and electric utility fuel receipts.
Reports of total federal acreage and agency ownership seem
to have vanished as have data on production from federal coal
leases. EIA has deemed confidential fuel receipts by nonutility
generators, generously defined nonutility, and thus lessened
the completeness of plant coverage.
An enormous, indigestible literature covers the environ-
mental issues sketched here. The contributors include govern-
mental agencies, the numerous groups arguing for increased
environmental controls, private research organizations includ-
ing several devoted to limited government, and many indepen-
dent observers. The Lomborg survey noted above is but one of
the skeptical reviews coming from various sources including
both committed advocates of free markets and clearly indepen-
dent observers. The environmental movement has undertaken
so excessively comprehensive an agenda of opposition that
book-length critiques of excesses regularly appear and often
produce vigorous efforts to refute. EPA generated many mas-
sive documents relevant to the issues discussed. They include
statements of policies in specific area, supporting regulatory
impact studies, surveys of the impacts of the major pollutants,
and even three overviews of the estimated costs and benefits of
pollution control.
The core of global warming advocacy is the work of the
Intergovernmental Panel on Climate Change. The US State
Department prepares a periodic report on US progress in the
area. The supporting literature is enormous. The dissenting
literature comes largely from several market-oriented research
organizations such as the Cato Institute, the Heartland
-
Institute, and the Competitive Enterprise Institute; a weekly
newsletter The Week That Was presents extensive material skep-
tical about action on global warming and other environmental
realms. Several economists, most notably William Nordhaus at
Yale, have generated estimates of the economic impacts of
warming.
See also: Allocation Tools: Coasean Bargaining; EnvironmentalCost-Benefit Analysis; Climate Change and Policy: Carbon Taxes;Intergovernmental Panel on Climate Change (IPCC); Markets/Technology Innovation/Adoption/Diffusion: TechnologicalChange and Climate Change Policy; Media Non-Biological:Economics of Exploration for and Production of Exhaustible Resources;Non-Renewable Fossil/Nuclear/Electricity Markets:Economics of Peak Oil; Policies/Incentives: Enforcement; PriceInstruments; Prices versus Quantities; Quantity Instruments; SO2Program; Standards; Political Economy: Political Economy ofInstrument Choice; Political Economy of International EnvironmentalAgreements; Renewable/Alternative Energy: EconomicImplications of Wind Power Intermittency; Economics of Wind Power:An Introduction.
Further Reading
Ackerman BA and Hassler WT (1981) Clean Coal/Dirty Air; or How the Clean Air ActBecame a Multibillion-Dollar Bail-out for the High-Sulfur Coal Producers and What
Analysis No. 684.
International Energy Agency (annual) Coal Information. Paris: Organisation forEconomic Co-operation and Development.
Lomborg B (2001) The Skeptical Environmentalist: Measuring the Real State of theWorld. Cambridge: Cambridge University Press.
Mann ME (2012) The Hockey Stick and the Climate Wars: Dispatches from the FrontLines. New York: Columbia University Press.
Spulber DF (1989) Regulation and Markets. Cambridge, MA: The MIT Press.Taylor J and Samples J (2007) The delegation of legislative powers. In: Boaz D (ed.)
Cato Handbook for Policymakers, 7th edn, 8390. Washington, DC: The CatoInstitute.
Thaler RH and Sunstein CR (2003) Libertarian paternalism. American Economic Review93(2): 175179.
Tol RSJ (2009) The economic effects of climate change. Journal of EconomicPerspectives 23(2): 2951.
Tribe LH, Branson JD, and Duncan TL (2010) Too Hot for Courts to Handle: FuelTemperatures, Global Warming, and the Political Question Doctrine. Washington,DC: Washington Legal Foundation.
Relevant Websites
http://www.bp.com/ British Petroleum.http://www.cato.org/ Cato Institute.http://cei.org/ Competitive Enterprise Institute.http://heartland.org Heartland Institute.http://www.hubbertpeak.com Hubbert Writings.http://www.ipcc.ch Intergovernmental Panel on Climate Change.http://www.kohlenstatistik.de Statistik der Kohlenwirtschaft.http://webarchive.nationalarchives.gov.uk and http://www.hm-treasury.gov.uk/
sternreview_index.htm Stern Report.http://www.sepp.org The Week that Was.http://www.eia.gov US Energy Information Administration.http://www.epa.gov US Environmental Protection Agency.
Non-Renewable Fossil/Nuclear/Electricity Markets | Coal: Prospects in the Twenty-First Century 145Should be Done About It. New Haven: Yale University Press.Gordon RL (2011) The gulf oil spill: Lessons for public policy. Cato Institute Policy
Coal: Prospects in the Twenty-First Century: Exhaustion Trumped by Global Warming?GlossaryCoase, Coal, and Coal RegulationThe Coase Conundrum and Global WarmingConclusion: Festina LenteNotes on the Literature and Data on CoalFurther ReadingRelevant Websites