THE UNSEEN COSTS OF COAL-GENERATED ELECTRICITY

Megan E. Hansen, BS, Strata Policy

Randy T Simmons, PhD, Utah State University

Ryan M. Yonk, PhD, Utah State University

The Institute of Political Economy (IPE) at Utah State University seeks to promote a better understanding of the foundations of a free society by conducting research and disseminating findings through publications, classes, seminars, conferences, and lectures. By mentoring students and engaging them in research and writing projects, IPE creates diverse opportunities for students in graduate programs, internships, policy groups, and business.

PRIMARY INVESTIGATORS:

Megan E. Hansen, BS Strata Policy

Randy T Simmons, PhD Utah State University

Ryan M. Yonk, PhD Utah State University

STUDENT RESEARCH ASSOCIATES:

Matthew Crabtree Jordan Floyd

Brian Isom Michael Jensen

Ryan Lee Grant Patty Josh Smith Devin Stein

TABLE OF CONTENTS Table of Contents ................................................................................................................................................................ 2Executive Summary ............................................................................................................................................................. 1Coal in the U.S. Energy Market .......................................................................................................................................... 2Explicit (Seen) Cost Factors ................................................................................................................................................ 6Levelized Cost of Electricity ................................................................................................................................................ 6

Capital Costs ................................................................................................................................................................. 8Operations & Maintenance Costs ................................................................................................................................. 8Capacity factor .............................................................................................................................................................. 9Transmission Costs ..................................................................................................................................................... 10

Implicit (Unseen) Cost Factors .......................................................................................................................................... 11Federal Coal Policies ................................................................................................................................................... 11Social and Environmental Costs ................................................................................................................................. 11Environmental and Health Regulations ...................................................................................................................... 11Federal Support ........................................................................................................................................................... 17Federal Energy Policy and the Implicit Costs of Coal ................................................................................................. 21State Coal Policies ...................................................................................................................................................... 21States Fighting New EPA Regulations ........................................................................................................................ 22States Supporting New EPA Regulations ................................................................................................................... 23Renewable Portfolio Standards .................................................................................................................................. 24State Energy Policy and the Implicit Costs of Coal ..................................................................................................... 26

Key Findings ...................................................................................................................................................................... 27Conclusion ......................................................................................................................................................................... 28Appendix A: ....................................................................................................................................................................... 29Appendix B: ....................................................................................................................................................................... 32Appendix C: ....................................................................................................................................................................... 36

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THE UNSEEN COSTS OF COAL-GENERATED ELECTRICITY

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them." -- Frederic Bastiat, 1848

EXECUTIVE SUMMARY

This report explores both explicit and implicit factors that influence the cost of producing electricity from coal. The explicit, or seen costs of coal-fired electricity, include cost components such as power plant development and construction, operation & maintenance, and transmission infrastructure costs. Often overlooked, however, are the implicit costs of coal-fired electricity, caused by government subsidies, mandates, and regulations that distort the electricity market. This report does not estimate an actual value for the cost of producing electricity from coal, rather, it identifies and analyzes those factors that policymakers should consider.

We first examine the explicit costs of producing electricity from coal. Then we explore the implicit costs of coal-generated electricity, which are the effect of subsidies, regulations, and mandates on what taxpayers and electricity consumers actually pay for electricity. Because they are often overlooked in cost estimates, implicit costs are the focus of this report.

Federal and state policies distort the cost of coal electricity both by transferring wealth and market share to coal electricity producers, and by imposing costly regulations on coal electricity producers. Both policies distort energy markets, ultimately forcing consumers to pay more for electricity than they otherwise would.

In this report we also show that mandates for electricity sources other than coal distort the electricity market. State mandates that require a specific percentage of a state's electricity to be produced from renewable sources erode the market share for non-renewable sources. Mandates prevent consumers from selecting the most efficient source of electricity generation. Electricity consumers are left with a grid fueled by higher cost resources than would be chosen without subsidies.

In addition to subsidies and mandates for non-coal sources, new environmental regulations - affecting both coal resource extraction practices, and coal-fueled power plant environmental emissions - drive up coal electricity production costs. These environmental regulations can have benefits by counteracting real environmental problems

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caused by coal-generated electricity, but also come with large economic costs that increase the unseen costs of coal power.

Government policies of all three types described above interfere with energy markets and distort the cost of coal electricity. These costs are paid for by electricity consumers and taxpayers across the US.

COAL IN THE U.S. ENERGY MARKET

The United States uses coal—an abundant, affordable, and reliable resource—to generate a large portion of the nation's electricity. In 2013, the United States generated about 39 percent of its electricity from coal, more than any

other energy source.1 In terms of total monetary value, coal received 6 percent of federal subsidies for energy in 2013.2 As Figure 1 shows, renewable sources like wind and solar received larger subsidies while generating a much smaller percentage of the nation's electricity.

Figure 1: Federal Electricity Subsidies and Electricity Generation by Source3

There are two common methods for producing energy with coal: conventional coal pulverization and integrated

gasification combined cycle (IGCC).4 Conventional coal production grinds coal into a fine powder. The powder is burned,

1 Energy Information Administration (EIA). 2015, March. "Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013." Pg. xix and xxi. Retrieved from: http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf 2 Ibid. 3 Energy Information Administration (EIA). 2015, March. "Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013." Pg. xix and xxi. Retrieved from: http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf. The data for this chart were taken from Table ES4 and Table ES5. The numbers may not sum to 100 percent because of independent rounding. 4 IGCC uses coal to create “syngas,” a fuel that releases fewer harmful emissions than conventional coal when burned. Sulfur or mercury removed from the fuel can be repurposed or stored, rather than being released into the environment. Heat from the burning process can be used in a steam cycle to produce additional energy. Because IGCC is an expensive developing technology, this report will focus primarily on the cost of conventional scrubbed coal. Thus, when the term "coal" is used in the cost tables below, this refers to conventional scrubbed coal.; Rubin, E., et al. 2007, May. “DEVELOPMENT AND APPLICATION OF OPTIMAL DESIGN CAPABILITY FOR COAL GASIFICATION SYSTEMS.” Pg. 3-4. Retrieved from: http://repository.cmu.edu/cgi/viewcontent.cgi?article=1073&context=epp

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heating steam that turns a turbine to generate electricity.5 Methods of reducing the amount of carbon dioxide and pollutants emitted into the air include scrubbing and carbon capture and sequestration.6 These processes reduce emissions but result in higher costs for coal-generated electricity.

Coal generated about 50 percent of electricity in the United States in 1980.7 Three and a half decades later, the percentage of US electricity generated from coal has dropped to 39 percent.8Electricity generated from coal is declining due to a combination of factors. Compliance with federal environmental regulations is costly. State mandates for sources other than coal reduce its market share. State and federal financial support of specific electricity sources distorts the energy market. Finally, coal faces increasing competition from natural gas.

The United States possesses enough recoverable coal reserves that current extraction rates will not exhaust

recoverable reserves forover 250 years at current consumption rates.9 Figure 2 shows the world's recoverable reserves by country.

5 American Electric Power. n.d. “Pulverized Coal Technologies.” Retrieved from: https://www.aep.com/about/IssuesAndPositions/Generation/Technologies/PulverizedCoal.aspx 6 U.S. Department of Energy. 2013. “The Clean Coal Technology Program” Retrieved from: http://www.fossil.energy.gov/education/energylessons/coal/coal_cct2.html; U.S. Environmental Protection Agency. 2015. “Carbon Dioxide Capture and Sequestration”. Retrieved from: http://www3.epa.gov/climatechange/ccs/ 7 The Shift Project. n.d. “Breakdown of Electricity Generation by Source.” Retrieved from: http://www.tsp-data-portal.org/Breakdown-of-Electricity-Generation-by-Energy-Source#tspQvChart 8 U.S. Energy Information Administration. 2015, October 27. “Table 1.1. Net Generation by Energy Source: Total (All Sectors), 2005-August 2015.” Retrieved from: http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_1_01. Percentage obtained by dividing 2014 coal generation by 2014 total generation. 9 U.S. Energy Information Administration. 2015. “Coal Explained: How Much Coal Is Left” Retrieved from: http://www.eia.gov/energyexplained/index.cfm?page=coal_reserves

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Figure 2: Recoverable Coal Reserves10

Proponents of coal energy claim it is abundant and provides cheap and reliable electricity, which is necessary for a robust economy and for human well-being.Opponents of coal energy claim it is harmful to both the environment and human health, and that coal power plant emissions contribute significantly to global climate change.This report is not intended to resolve this debate, only to describe the explicit and implicit factors that should be included in the cost of coal-generated electricity.

Coal faces an unfriendly political climate. Since 2010, the Beyond Coal campaign, a joint effort of the Sierra Club and

Michael Bloomberg, has claimed to have helped cause 188 coal power plants to be repurposed or closed.11 The campaign advocates replacing coal with renewable alternatives such as wind and solar energy.12 In addition to political pressure, coal faces market pressure from natural gas. Costs for natural gas have gone down largely as a result of the

widespread adoption of hydraulic fracturing and directional drilling.13

10 The data is from: U.S. Energy Information Administration. n.d. "International Energy Statistics." Retrieved November 2, 2015 from: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=7&aid=6; The chart is based on: Institute for Energy Research. 2015, March. "Encyclopedia Entry: Coal." Institute for Energy Research. Retrieved from: http://instituteforenergyresearch.org/topics/encyclopedia/coal/ 11 Restuccia, A. 2015, April 8. "Michael Bloomberg's War on Coal." Politico. Retrieved from: http://www.politico.com/story/2015/04/michael-bloomberg-environment-coal-sierra-club-116793.html 12 Sierra Club. (n.d.) "About Us." Retrieved June 8, 2015, from: http://content.sierraclub.org/coal/about-the-campaign 13 Martinson, E. 2015, April 16. "The Fall of Coal." Politico. Retrieved from: http://www.politico.com/story/2015/04/coal-power-plants-epa-regulations-117011.html

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Over the last two decades, the share of net electricity generated from coal has been steadily declining, while the share

from natural gas has been steadily increasing.14 Combined, fossil fuels generate roughly 67% of electricity in the United States.15 Figure 3 shows the share of net electricity generation from coal and natural gas from 1980 to 2012.

Figure 3: Coal and Natural Gas Share of Net Generation16

Natural gas currently faces a less stringent regulatory environment than coal. When faced with the choice of retrofitting an aging coal plant to comply with federal regulations or switching to natural gas, electricity producers are increasingly choosing the latter because it is less costly. From 2014 to 2015, coal electricity generation decreased in all regions except the Northeast, where coal is not used, while natural gas electricity production increased in all regions except

Florida.17

14 Kelly, C., and D. Rosner. 2012, June 15. "Low Natural Gas Prices Drive Fuel Shifts in the Electric Power Sector." Bipartisan Policy Center. Retrieved from: http://bipartisanpolicy.org/blog/low-natural-gas-prices-drive-fuel-shifts-electric-power-sector/ 15 Energy Information Administration 2015, April 14. “Annual Energy Outlook: Electricity Generation.” Retrieved from: http://www.eia.gov/forecasts/aeo/section_elecgeneration.cfm 16 U.S. Energy Information Administration (EIA). n.d. “Annual Energy Review: Electricity: Electricity Net Generation: 8.2b Electric Power Sector, 1949-2012.” Retrieved from: http://www.eia.gov/totalenergy/data/annual/index.cfm 17 U.S. Energy Information Administration (EIA). 2015, October 27. “Electric Monthly Update.” Retrieved from: http://www.eia.gov/electricity/monthly/update/resource_use.cfm#tabs_gen-2

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The following two sections examine the explicit, or seen, costs involved in generating electricity from coal, and the implicit (or unseen) costs that arise from government intervention in the energy market.

EXPLICIT (SEEN) COST FACTORS

There are four main explicit cost factors for producing electricity from coal. Capital costs and operations and maintenance (O&M) costs are the first two and the largest cost components of generating electricity from coal. The third is coal’s capacity factor, which is a measurement of how much electricity a coal plant generates as a percentage

of its maximum output capacity.18 Finally, the cost of electricity generated from coal is also affected by transmission costs. Each of these four cost factors is examined in this section, but to understand these factors, the overall explicit cost of electricity, also known as the “levelized” cost of electricity, must be understood.

LEVELIZED COST OF ELECTRICITY

A common metric for comparing the cost of electricity from different technologies and fuels is the levelized cost of electricity (LCOE). The LCOE is the sum of estimated lifetime capital costs, operations and maintenance costs, and

transmission investment.19 These costs are distributed over the estimated lifetime of an energy plant and are related in terms of dollars per megawatt-hour. Of the major studies on the cost of electricity, the most commonly referenced is the Energy Information Administration’s (EIA) Annual Energy Outlook. EIA estimates place the cost of new conventional coal at $95.1 per megawatt-hour, which is cheaper than solar but more expensive than natural gas or

wind power.20

Table 1: EIA Annual Energy Outlook 201521

Coal IGCC22 Natural Gas23 Wind24 Solar

LCOE (2013 $/MWh)

95.1 115.7 75.2 73.6 125.3

18 The capacity factor used in calculating cost estimates has a strong effect on how affordable a given energy technology appears to be. 19 Some of the costs not captured in the LCOE estimate are: transmission congestion losses; distribution and retailing costs; owner profit (this may be impossible to fully account for but the EIA makes an attempt to incorporate this into the LCOE by estimating the expected return on equity and borrowing costs); and federal subsidies, such as the Production Tax Credit, the Investment Tax Credit, and some loan guarantees. The LCOE estimate does not include all subsidies (such as state level subsidies like renewable energy credits and property tax abatements). Additionally, the EIA stops listing the subsidies mentioned on the date of their expiration while the IRS continues to honor them. U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 20 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 21 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 22 Listed as “Advanced Coal.” The EIA uses the terms "advanced coal" and "IGCC" interchangeably. 23 Listed as Conventional Combined Cycle. 24 The EIA notes in the AEO report that the LCOE for fossil fuels (dispatchable sources) cannot be directly compared with the LCOE for non-dispatchable sources like wind and solar.

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The EIA approach to estimating energy costs is not incorrect—it simply has different goals than this study. The EIA estimates the cost of producing electricity from various sources in the future, and assumes government interventions in the energy market. This report, on the other hand, seeks to identify all of the factors involved in the cost of generating electricity today. While predictive costs are necessary for developers to make informed decisions about building new energy capacity, policy should be based on existing costs and how new policy will increase or decrease these costs. These factors include the market-distorting effects of government intervention in the energy market and the cost of these policies borne by taxpayers and electricity consumers.

Electricity production from dispatchable sources, such as coal and natural gas, can be scaled up or down to meet demand. Production from non-dispatchable energy sources, like wind and solar, cannot be increased relative to demand. Therefore, as the EIA notes in theAEO report, the levelized costs of dispatchable and non-dispatchable technologies

are not directly comparable.25

Wind and solar cannot consistently or controllably increase production of electricity on demand because optimal sunlight and wind are not consistently available nor are they controllable. If the transmission system is not fed with a steady and controllable supply of electricity, costly forms of instability can occur. To avoid shortages, there must be enough dispatchable power plants to provide electricity to cover shortages left by solar and wind energy. For a number of reasons, such as renewable energy mandates and tax-credit-based incentives for electricity supplied to the grid by renewables, dispatchable power plants must back down whenever renewables have electricity to supply to the grid.

This reduces revenue and raises levelized fixed costs for dispatchable sources of electricity such as coal.26

The EIA includes some subsidies and regulations in its calculation of the cost of electricity, but in a way that provides a distorted view of the cost of electricity produced by different sources. When calculating the LCOE for "greenhouse gas (GHG) intensive" technologies including coal, the EIA adds 3 percentage points to capital costs to represent the

implicit hurdle of emissions regulation.27 This makes coal appear more expensive than it really is. The EIA also includes implicit subsidies for renewables that make wind appear less expensive than it really is.28

Implicitly including these extra costs hides the effects of regulation and subsidies on the cost of generating electricity from coal, wind, or solar, and portrays an energy market different from reality. Subsidies do not reduce costs, they simply transfer part of the cost of energy production from producers to taxpayers. Governmental support to the energy industry may lower production costs, but it increases the cost of energy to society by increasing the taxpayer burden and raising electricity rates.

George Taylor and Thomas Stacy’s IER reportThe Levelized Cost of Electricity from Existing Energy Resources (2015) investigates another aspect of the EIA’s method of calculating electricity cost. The EIA estimates the cost of electricity from new power plants coming on line five years into the future, but does not compare the cost of electricity from

25 The levelized fixed costs assigned to non-dispatchable technologies are not 1:1 substitutes for the levelized fixed cost of dispatchable technologies. Rather, the more non-dispatchable electricity that is produced, the higher the levelized fixed cost of the dispatchable sources from which the non-dispatchable sources derive market share; U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 26 7 Fisher, T. 2014, April 23 April. "AWEA's Bold Push for More Wind Welfare." Institute for Energy Research. Retrieved from: http://instituteforenergyresearch.org/analysis/aweas-bold-push-for-more-wind-welfare/; Institute for Energy Research. 2014, October 27. “Solar Energy’s Duck Curve.” Retrieved from: http://instituteforenergyresearch.org/solar-energys-duck-curve/ 27 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 28 Taylor, George, and Tanton, Taylor. 2012, December. "The Hidden Costs of Wind Electricity." American Tradition Institute. Retrieved from: http://www.atinstitute.org/wp-content/uploads/2012/12/Hidden-Cost.pdf

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prospective new power plants to the cost of generating electricity from existing resources. EIA’s predictive estimates are misleading when used as justification for policies dictating subsidies or mandates for renewables because they ignore the fact that generating electricity from existing coal plants is much cheaper than electricity from any new source. Stacy and Taylor find the cost of generating electricity from existing coal plants is $38.4 per megawatt-hour,

which is slightly more than one-third of EIA estimates for electricity from new conventional coal.29 Existing coal electricity is also cheaper than new wind electricity, which the EIA estimates to be $73.6 per megawatt-hour in 2020.30

CAPITAL COSTS

The capital costs of coal energy are the initial costs a producer must pay to bring a plant to commercially active status. These costs include purchasing the land the plant will be built on, obtaining permits to build, building the plant itself, construction insurance, interest on capital debt, and often contractual private equity stake remuneration. Coal’s capital costs, at $60.4 per megawatt-hour for conventional coal, and $76.9 per megawatt-hour for IGCC, are the largest

component of coal’s LCOE.31

Table 2: Capital Costs32

Coal IGCC Natural Gas Wind Solar

Capital Costs (2013 $/MWh)

60.4 76.9 14.4 57.7 109.8

OPERATIONS & MAINTENANCE COSTS

Operations and maintenance (O&M) costs include both fixed and variable costs. Fixed O&M expenses are static costs unaffected by how much energy is produced. These costs are primarily made up of scheduled upkeep and maintenance costs. Both conventional coal and IGCC have low fixed O&M costs-- at $4.2 per megawatt-hour and $6.9 per megawatt-

hour according to the EIA.33

Variable O&M costs depend on how much energy is produced. Fossil fuels have high variable O&M when compared to renewable energies like solar, because solar power, unlike coal, does not have to be mined. EIA estimates for coal

energy’s variable O&M are $29.4 per megawatt-hour for conventional coal and $30.7 per megawatt-hour for IGCC.34 Table 3 shows both fixed and variable O&M costs for coal-generated electricity.

29 Stacy, Thomas F. and Taylor, George S. 2015, June. “The Levelized Cost of Electricity from Existing Sources.” Pg. 1. Institute for Energy Research. Retrieved from: http://instituteforenergyresearch.org/wp-content/uploads/2015/06/ier_lcoe_2015.pdf 30 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 31 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 32 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 33 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 34 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new

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Table 3: Operations & Maintenance Costs35

Coal IGCC Natural Gas Wind Solar

Fixed Operations & Maintenance Costs (2013 $/MWh)

4.2 6.9 1.7 12.8 11.4

Variable Operations & Maintenance Costs (2013 $/MWh)

29.4 30.7 57.8 0 0

CAPACITY FACTOR

The capacity factor of coal is a measurement of how much electricity a plant produces as a percentage of its maximum

output capacity.36 Table 4 compares the capacity factors of five sources of electricity generation. Traditional coal energy’s capacity factor is one of the highest among electricity fuels, with estimates mainly ranging from about 80 to

95 percent.37 As a baseload energy provider, this means that a high level of electricity can be produced for an extended period of time.

generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 35 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 36 U.S. Energy Information Administration. n.d. "Glossary." Retrieved from:http://www.eia.gov/tools/glossary/index.cfm?id=C; The capacity factor used in calculating cost estimates has a strong effect on how affordable a given energy technology appears to be. For example, say the levelized fixed costs of a power plant are calculated to be $30 per MWh at a 90 percent capacity factor. If the plant utilization rate turns out to be only half of what was projected–resulting in a capacity factor of 45 percent–the levelized fixed cost doubles to $60 per MWh. Counterintuitively, levelized variable costs do not vary with capacity factor but levelized fixed costs vary inversely with change in capacity factor. 37 Open Energy Information. 2014. "Transparent Cost Database: LCOE." National Renewable Energy Laboratory. Retrieved from: http://en.openei.org/apps/TCDB/; U.S. Energy Information Administration. 2015. “Annual Energy Outlook 2015” Retrieved from: http://www.eia.gov/forecasts/aeo/pdf/0383(2015).pdf; U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm

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Table 4: EIA Capacity Factors38

Coal IGCC Natural Gas39 Wind Solar

Capacity Factor (%)

85 85 87 36 25

TRANSMISSION COSTS

Coal produces electricity cost-effectively in any region of the United States and its transmission costs reflect that advantage. Unlike wind and solar, coal is not dependent on location to generate electricity. Wind and solar, at their current low capacity factors, are only capable of producing an affordable amount of electricity in areas with high wind

or sun levels.40 In addition, areas where wind resources are plentiful tend to be farther away from population centers, meaning additional transmission lines have to be built to carry electricity to demand centers.

Coal, however, is not a location-dependent source as coal-fired power plants can be built anywhere. To minimize transmission costs, however, power companies regularly build new fossil fuel plants near existing plants. This option

is not typically available to renewable energy producers, as their production ability is usually dependent on location.41 As table 5 shows, transmission costs for coal-generated electricity are $1.2 per megawatt-hour, significantly lower

than wind or utility-scale solar power.42

Table 5: EIA Transmission Costs43

Coal IGCC Natural Gas44 Wind Solar

2013 $/MWh 1.2 1.2 1.2 3.1 4.1

38 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 39 Listed as Conventional Combined Cycle 40 National Renewable Energy Laboratory. 2015, September 17. “Wind Maps.” Retrieved from: http://www.nrel.gov/gis/wind.html; National Renewable Energy Laboratory. 2015, February 2. “Solar Maps.” Retrieved from: http://www.nrel.gov/gis/solar.html; 41 Giberson, M. 2013, October. "Assessing Wind Power Cost Estimates." Institute for Energy Research. Pg. 8. Retrieved from: http://instituteforenergyresearch.org/wp-content/uploads/2013/10/Giberson-study-Final.pdf 42 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 43 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 44 Listed as Conventional Combined Cycle

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IMPLICIT (UNSEEN) COST FACTORS

FEDERAL COAL POLICIES

Modern energy policy favors renewable sources of electricity like wind and solar over conventional sources such as coal and natural gas. Appendix C provides an overview of U.S. tax incentives across the energy sector. Our analysis here focuses on the most influential policies that affect the production of electricity from coal today.

Federalcoal policies affect the cost of coal-generatedelectricitybydistorting the energy market.These policies include both regulationsand subsidies. Inthis section, we identify some of the reasons these policies are enacted as well as their effects on the cost of coal-generated energy paid by both electricity consumers and taxpayers.

SOCIAL AND ENVIRONMENTAL COSTS

One of the key justifications for government intervention in the energy market is to address social and environmental costs. An accurate estimate of the cost of producing electricity should include health and environmental costs imposed on society that are not borne by producers or consumers, often known as externalities. Social and environmental costs include potential health problems that power plants create for the nearby population, negative effects of energy production on the environment, and effects on global climate change.

Analysts have attempted to price carbon emissions based on their social and environmental effects. A publication from the Cato Institute notes that estimates for the proper tax on carbon emissions vary widely—from $5 to $100 per ton—

while estimates for the damages caused by carbon dioxide range from $5 to $35 per ton.45

The high degree of uncertainty involved in the calculation of social and environmental costs of carbon makes them difficult to precisely quantify. Economist Robert Pindyck, a professor at the Massachusetts Institute of Technology, notes that economists have attempted to quantify the social cost of carbon by developing integrated assessment

models. Pindyck notes, "these models have crucial flaws that make them close to useless as tools for policy analysis."46 However, the difficulty and imprecision of quantifying the cost does not imply that there is no cost, just that we do not

know what that cost is.47

ENVIRONMENTAL AND HEALTH REGULATIONS

Coal-fired power plants produce several airborne pollutantsproven to be harmful to human health, including sulfur

dioxide (SO2) and nitrogen oxides (NOx).48 These gases are not only harmful on their own,they can also react with other gases and chemicals in the atmosphere toact as an additional source of particulate matter, which is also harmful

45 Litterman, B. 2013. “What Is the Right Price for Carbon Emissions?” CATO; Regulation: Energy & Environment. Pg. 38. Retrieved from: http://object.cato.org/sites/cato.org/files/serials/files/regulation/2013/6/regulation-v36n2-1-1.pdf 46 Pindyck, R. S. 2013, July. "Climate Change Policy: What do the Models Tell Us?" National Bureau of Economic Research. Retrieved from: http://web.mit.edu/rpindyck/www/Papers/Climate-Change-Policy-What-Do-the-Models-Tell-Us.pdf 47 Establishing an accurate measure of the social cost of carbon, while important, is outside the scope of this report; Ibid. 48 U.S. Energy Information Administration. 2013, February 27. “Power plant emissions of sulfur dioxide and nitrogen oxides continue to decline in 2012” Retrieved from: http://www.eia.gov/todayinenergy/detail.cfm?id=10151

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to human health.49 The EPA has regulated theseemissions since the Clean Air Act was passed in 1970, and continues to enforce regulations dictating the amount of theseemissions coal plants can produce.

THE MERCURY RULE

While SO2 and NOx have a long history of regulation, other emissions, such as mercury, are only recently being regulated.Coal-fired power plants release about 49 percent of total annual U.S. mercury emissions,more than any

other source.50 When released into the environment, mercury can accumulate in the bodies of fish, which can cause health problems if consumed. Mercuryharms infants, children, and especially fetuses and pregnant mothers. It can cause neurological and developmental disabilities, stunting “cognitive thinking, memory, attention, language, and fine

motor and visual spatial skills.”51

In 2012, the EPA released a new regulation restricting mercury emissions from coal and oil plants. The Mercury and Air Toxics Standards (MATS) quickly became known as the “Mercury Rule,” and has been the subject of political controversy since its proposal. According to the EPA, theMATSwill “prevent 90 percent of the mercury in coal burned

in power plants from being emitted to the air,” once fully implemented.52 The EPA estimates that this reduction will result in total benefits ranging from $37-90 billion.53

In response, 21 states filed suit against the EPA, arguing that becausethe agency neglected to consider the costs of

regulating mercury emissions before making the decision to regulate, the regulation violated the Clean Air Act (CAA).54 The CAA requires the EPA to regulate hazardous emissions not specified by the act only when "necessary and appropriate." Because mercury is not specified by theCAA, and because determining if a regulation is necessary and appropriate requires accounting for costs, the plaintiffs contended that the EPA is therefore required to take costs into account when proposing the regulation of mercury. The EPA argued that because the CAA forbids the EPA from taking costs into account when regulating otheremissions like SO2 and NOx,the EPA is not required to take costs into account when it regulates mercury either. In June of 2015, the Supreme Court agreed with the plaintiffs and rejected the MATS,

requiring lower courts to determine how to takethe cost of regulating mercury emissions into account.55

Some experts believe that the Supreme Court’s ruling will have little effect on the coal industry in the long run. Most

coal producers have already paid the costs of compliance in anticipation of theMATS.56 Even though the MATS wasonly in effect for afew months, coal producers had to prepare for the rule before it went into effect to ensure they would be compliant by April of 2015. Fifty-eight coal-fired power plants around the country reduced output to below

capacity or shut down completely to comply with the Mercury Rule.57 Many of the plants that went offline were older

49 Environmental Protection Agency (EPA). 2015. “Air Trends: Basic Information.” Retrieved from:

http://www.epa.gov/airtrends/sixpoll.html 50 Environmental Protection Agency (EPA). 2015. “What are the biggest sources of mercury air emissions in the U.S.?” Retrieved from: https://publicaccess.zendesk.com/hc/en-us/articles/211395308-What-are-the-biggest-sources-of-mercury-air-emissions-in-the-U-S- 51 Environmental Protection Agency (EPA). 2015. “Mercury: Health Effects.” Retrieved from: http://www.epa.gov/mercury/effects.htm 52 Environmental Protection Agency (EPA). 2015. “What is the EPA doing to reduce emissions of mercury into the air?” Retrieved from: http://publicaccess.supportportal.com/link/portal/23002/23012/Article/21820/What-is-EPA-doing-to-reduce-emissions-of-mercury-into-the-air 53 Environmental Protection Agency (EPA). 2015. “Healthier Americans”. Retrieved from http://www3.epa.gov/mats/health.html 54 Institute for Energy Research (IER). 2015, April 28. “EPA Rules Bring Pink Slips to a Town Near You.“ Retrieved from: http://instituteforenergyresearch.org/analysis/epa-continues-all-pain-no-gain-policies-with-mercury-and-air-toxic-standards/ 55 Michigan et al. v. EPA et al. October 2014. Retrieved from: http://www.supremecourt.gov/opinions/14pdf/14-46_10n2.pdf 56 Wolff, Eric. 14 May 2015. “Supreme Court’s eventual MATS ruling will be (mostly) moot”. Retrieved from: https://www.snl.com/InteractiveX/Article.aspx?cdid=A-32620730-13109 57 Martinson, E. 2015, April 16. "The Fall of Coal." Politico. Retrieved from: http://www.politico.com/story/2015/04/coal-power-plants-epa-regulations-117011.html

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and were not able to meet the standards in a cost-effective way.58 The rule led to the removal of about 16,000 MW of power from the grid. This 16,000 MW represents lost capacity that once powered 16 million American homes.59

THE CLEAN POWER PLAN

The EPA has set carbon emission standards for all coal-fired power plants. Known as the Clean Power Plan (CPP), these standards will require electric utilities to reduce carbon emissions to 32 percent below the recorded levels from the year 2005 by 2030 on a state-by-state basis. Like most provisions in the CAA, the CPP sets a standard for the states

and then allows the states to decide how best to meet that standard.60The total U.S. energy sector produces over 5.4 billion metric tons of CO2 annually—a third of which comes from electricity generation. Coal power plants currently produce a little over 1.5 billion metric tons of CO2, making up 76 percent of annual carbon emissions from electricity

generation in the United States and almost 29 percent of total US annual energy-related CO2 emissions.61

The EPA cites global climate change as its justification for regulating CO2 emissions.According to the EPA, unlimited CO2 emissions will result in an increased frequency of heatwaves and drought, worsening smog, and an increased intensity of natural disasters like hurricanes, extreme precipitation, and flooding. The agency also argues that increased emissions will expand the range of ticks and mosquitoes, exacerbating the spread of dangerous arboviruses like West

Nile and Hantavirus.62 The EPA claims that the CPP will not only mitigate environmental costs, itwillalso create economic benefits ranging from $3.6 to $160 billion, depending on the assumptions and calculations used.63

These assertions have not gone unchallenged. Citing a wide range of data, Dr. Roger Pielke Jr. has written extensively about the costs of mitigating climate change. In a 2013 congressional testimony, he argued that while many researchers project that future climate change may lead to a greater probability of extreme weather events, the data that could prove or disprove this hypothesis will not be available for decades. Therefore, any claims about current weather events

being caused by warming are unfounded.64

Furthermore, the costs and benefits associated with climate change are typically calculated by using integrated

assessment models (IAMs). The EPA uses IAMs to estimate the costs mentioned above.65 These models are used to “[combine] scientific and socio-economic aspects of climate change primarily for the purpose of assessing policy

options for climate change control.”66 These models differ widely in their results, depending on the factors that the

58 Ibid. 59 Martinson, E. 2015, April 16. "The Fall of Coal." Politico. Retrieved from: http://www.politico.com/story/2015/04/coal-power-plants-epa-regulations-117011.html 60 Environmental Protection Agency. 2015, August 3. “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units”. Pg. 16. Retrieved from: http://www2.epa.gov/sites/production/files/2015-08/documents/cpp-final-rule.pdf 61 U.S. Energy Information Administration. 2015. “How much of the U.S. carbon emissions are associated with electricity?”. Retrieved from: http://www.eia.gov/tools/faqs/faq.cfm?id=77&t=11 62 EPA. 2015. “Learn About Carbon Pollution From Power Plants”. Retrieved: from:http://www2.epa.gov/carbon-pollution-standards/learn-about-carbon-pollution-power-plants 63 EPA. 2014. “Regulatory Impact Analysis for the Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed Power Plants”. p. ES-18 to ES-19 Retrieved from: http://www2.epa.gov/sites/production/files/2014-06/documents/20140602ria-clean-power-plan.pdf 64 Roger Pielke Jr. 11 December 2013. "Statement of Dr. Roger Pielke, Jr. to the Subcommittee on Science, Space, and Technology of the United States House of Representatives". Retrieved from: http://sciencepolicy.colorado.edu/admin/publication_files/2013.38.pdf 65 Interagency Working Group on Social Cost of Carbon. May 2013. “Technical Support Document: - Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis - Under Executive Order 12866”. Retrieved from: https://www.whitehouse.gov/sites/default/files/omb/assets/inforeg/technical-update-social-cost-of-carbon-for-regulator-impact-analysis.pdf 66 Kelly, David L. and Charles D. Kolstad. November 1998. “Integrated Assessment Models For Climate Change Control”. University of California: Santa Barbara. Retrieved from: http://www.econ.ucsb.edu/papers/wp31-98.pdf

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designer of a particular model thinks are relevant. IAMs are unable to account for adaptation and technological innovation, as these factors are highly unpredictable. Because adaptation and technological innovation may prove crucial to eventual climate change solutions, the inability to include them in a projection limits the accuracy of IAMs as appropriate tools for making good public policy.

Regulations of emissions like mercury, SO2, and NOx are easier to justify because these emissions have measurable negative effects on human health. The same cannot be said of carbon dioxide. Even if anthropogenic CO2 emissions contribute significantly to climate change, the benefits of abating climate change are uncertain. This uncertainty hinders any attempt to precisely quantify a level of social cost associated with each ton of CO2 released. Uncertainty, however, should not be interpreted to mean there are no benefits. Rather, that we do not know if limiting CO2 has benefits, and if there are, what those benefits would amount to.

Two of the most widely cited cost estimates of the draft CPP showcase the radical divergence in the CPP's expected effects. One estimate by the the Natural Resources Defense Council (NRDC) concludes that there could be net benefits

of anywhere from $21 billion to $53 billion in 2020 from the CPP.67 The second cost estimate by NERA Economic Consulting finds that under one scenario the CPP will cost about $366 billion between 2017 and 2031. A second scenario

NERA considers places the total consumer energy costs, over the same period, at $479 billion.68 The EPA estimates, on the other hand, which are based on the final rule released in August of 2015, that the CPP will result in net benefits

of $26 to $45 billion.69 The wide range in findings of these studies demonstrate the high level of uncertainty regarding what the effects of the CPP will actually be.

THE EFFECT OF REGULATION ON THE COST OF COAL

Regulations and subsidies increase the cost of coal-generated electricity in many ways. Regulation forces coal-fueled power plants to adopt stringent environmental standards, the cost of which is passed on to electricity consumers. Plants that are not capable of adapting must close. The replacement of existing coal fueled power plants may result in lower emissions and higher electricity prices.

In 2010, 48 percent of electricity generated by coal plants came from facilities without scrubbers: instruments which

reduce or eliminate targeted emissions before they are released.70 Carbon capture and storage technology can reduce carbon emissions by more than 90%.71 As the push by the EPA for decreasing CO2 emissions intensifies, federal regulation will affect emissions-heavy unscrubbed coal plants first.

Adapting a coal plant to meet goals for carbon capture--the process of removing carbon from the atmosphere and preventing it from entering the atmosphere--is an expensive undertaking. Carbon capture and storage creates an

estimated $24.30 per megawatt-hour increase in costs for advanced (IGCC) coal.72 In 2013, the EIA estimated a $41 per

67 Natural Resources Defense Council (NRDC). 2014, March. "Cleaner and Cheaper: Using the Clean Air Act to Sharply Reduce Carbon Pollution from Existing Power Plants, Delivering Health, Environmental, and Economic Benefits." Pg. 2. Retrieved from: http://www.nrdc.org/air/pollution-standards/files/pollution-standards-IB-update.pdf 68 NERA Economic Consulting. 2014, October. "Potential Energy Impacts of the EPA Proposed Clean Power Plan." Pg. S-7. Retrieved from: http://www.nera.com/content/dam/nera/publications/2014/NERA_ACCCE_CPP_Final_10.17.2014.pdf 69 Environmental Protection Agency (EPA). 2015, August. "The Clean Power Plan By the Numbers." Pg. 2. Retrieved from: http://www3.epa.gov/airquality/cpp/fs-cpp-benefits.pdf 70 U.S. Energy Information Administration. 2011, December 21. “Coal plants without scrubbers account for a majority of U.S. SO2 emissions.” Retrieved from: http://www.eia.gov/todayinenergy/detail.cfm?id=4410 71 Intergovernmental Panel on Climate Change. 2005. “Carbon Dioxide Capture and Storage.” Retrieved from: http://www.ipcc.ch/pdf/special-reports/srccs/srccs_wholereport.pdf 72 U.S. Energy Information Administration. 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new

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megawatt-hour increase in costs for conventional coal.73 Carbon capture can also reduce power output by up to 30 percent because some electricity is siphoned to power the capture equipment. 74 A 2010 report from the U.S. Department of Energy estimated carbon capture and storage could increase the cost of electricity for conventional coal

production by 80 percent.75 These additional costs of carbon capture represent unseen or implicit costs that should be included in the cost of coal-generated electricity.

Coal plants can reduce the added expense of carbon capture technology by selling the captured carbon rather than storing it. The CO2 that is sold is used in enhanced oil recovery: a process where the gas is pushed down into oil wells

to push the oil up and out. Enhanced oil recovery is done after conventional extraction has been exhausted.76 Cost estimates for carbon capture and storage done by coal plants vary. Retrofitting existing coal plants costs between $73

and $107 per ton of CO2, while the costs for new plants using low-rank coal are between $60 and $70.77 Repurposed CO2 is estimated to sell for $10 to $80 per ton, meaning that companies generating energy from coal can only cover

their costs under the best of circumstances.78 Depending on the social cost of carbon, the benefits of capture may or may not be cost effective.

The federal government administers programs meant to incentivize carbon capture and sequestration. According to the proposed budget, in fiscal year 2016, qualifying American power plants could receive a $50 tax credit per ton of CO2 emissions that are captured and stored or a $10 tax credit per ton of CO2 emissions that are captured and then

repurposed or sold.79 Coal electricity producers can recover some of the costs of carbon capture and sequestration through these subsidies. These policies, however, increase the unseen costs of coal-generated electricity because subsidies paid to coal electricity producers must ultimately be funded by taxpayers.

Because of costs imposed by federal and state environmental regulations, coal plants are being closed years, even decades, before their lifecycles conclude. In 2013, American Electric Power closed a Kentucky coal plant, choosing to do so instead of financing a $1 billion project to reduce plant pollution. A Politico analysis of data from the EIA found that from 2012 to 2015 at least 58 coal plants had either fully or partially shut down, taking 16,000 megawatts of

capacity off the grid.80 That same analysis estimates that In the next eight years, 76 more plants are expected to close,

generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm; Values were found by finding the difference between advanced coal and advanced coal with carbon capture and storage from the figures in Table 2. 73 International Energy Agency. 2013. “Technology Roadmap - Carbon capture and storage.” pg., 28. Retrieved from: http://www.iea.org/publications/freepublications/publication/technologyroadmapcarboncaptureandstorage.pdf 74 Center for Climate and Energy Solutions (C2ES). “Carbon Capture and Storage.” Retrieved from: http://www.c2es.org/technology/factsheet/CCS 75 U.S. Department of Energy (DOE) and U.S. National Energy Technology Laboratory (NETL). 2010. “DOE/NETL Carbon Dioxide Capture and Storage RD&D Roadmap.” Pg. 3. Retrieved from: http://www.netl.doe.gov/File%20Library/Research/Carbon%20Seq/Reference%20Shelf/CCSRoadmap.pdf 76 Center for Climate and Energy Solutions (C2ES). “Carbon Capture and Storage.” Retrieved from: http://www.c2es.org/technology/factsheet/CCS 77 Coninck, de H., and Benson, S. 2014, October. "Carbon Dioxide Capture and Storage: Issues and Prospects". Pg. 251. Annual Review of Environment and Resources. Volume 39. 243-270. DOI 10.1146/annurev-environ-032112-095222; Low-rank coal has lower levels of carbon and thus generates less energy than high-rank coal; Kentucky Geological Survey. 2012, August 1. "Classification and Rank of Coal". Retrieved from: https://www.uky.edu/KGS/coal/coalkinds.htm 78 Luckow, W., Stanton, E. A., Biewald, B., Fields, S., Jackson, S., Fisher, J., Ackerman, F. 2014, May 22. “CO2 Price Report, Spring 2014.” Pg. 19. Synapse Energy Economics , Inc. Retrieved from: http://www.synapse-energy.com/sites/default/files/SynapseReport.2014-05.0.CO2-Price-Report-Spring-2014.14-039.pdf 79 United States Government. 2015. “The President’s Budget Fiscal Year 2016.” Pg. 5. Retrieved from: https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/fact_sheets/investing-in-coal-communities-workers-and-technology-the-power-plan.pdf 80 Martinson, E. 2015. April 16. “The Fall of Coal.” Politico. Retrieved from: http://www.politico.com/story/2015/04/coal-power-plants-epa-

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taking 28,000 megawatts of capacity with them.81Not only are coal plants shutting down, few are scheduled to open in coming years.82 Artificial distortion of the energy market due to government policies, in addition to economic factors, have contributed to the decline of coal power plants. When regulations force coal power out of the market to be replaced with natural gas, coal, or wind, the added costs of building new generation capabilities are passed on to consumers and represent a hidden cost of generating electricity from coal.

Figure 44 : Coal power, retired (2012-14) and set for retirement (2015-23)83

regulations-117011.html 81 Ibid. 82 Ibid. 83 Ibid.

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FEDERAL SUPPORT

Another important implicit or unseen cost of coal-generated electricity is the cost of federal policies that favor specific industries.Theelectricity sector receives two general forms of support from the federal government: tax expenditures, which reduce the amount of taxes an organization or individual pays, and direct expenditures, which provide direct cash outlays to energy producers and consumers. Although modern coal production receives less federal support than renewable energies, this support should still be included in an accurate estimate of the cost of coal-generated electricity.

The coal industry has a long history of receiving support from the federal government. Taxpayers for Common Sense, a non-profit research organization, estimates that from 1950 to 2008, around $72 billion, measured in constant 2007 dollars,in federal support was awarded to the coal industry from the federal government. As shown in Table6, the $72

billion was a combination of tax expenditures, research and development grants, and direct expenditures.84 Since 2010, support for fossil fuels has slightly decreased while support for renewable energy has grown.85

Table 6: Subsidies to the Coal Industry From 1950 to 2008 in Constant 2007 Dollars86

Type of Subsidy Amount

Research and Development (from 1950-2003) $31 Billion

Tax Expenditures (from 1950-2003) $27 Billion

Alternative Fuel Production Credit (since 2002) $11 Billion

Clean Coal Technology Research and Development (since 1986) $2.9 Billion

Total Subsidies to Coal $72 Billion

In 2013, the Department of the Interior's Office of the Inspector General (OIG) released a report examining sales of federal coal mining leases to private industries. One of the focuses of the report was the BLM’s auction process for selling these leases. Specifically, the OIG wanted to address concerns that the federally regulated process of leasing coal on public lands was not earning the money it should be because of a lack of competition. The lease process requires a company to submit an application containing their preliminary assessment of a potential coal site to the BLM, who reviews the information. If the BLM is satisfied with the application, the agency conducts the lease sale. The sale is arranged as a competitive sealed bid procedure and is awarded to the company with the highest bid at or 84 Taxpayers for Common Sense. 2009. “Coal: A Long History of Subsidies.” Retrieved from: http://www.taxpayer.net/images/uploads/downloads/Coal_subsidies_factsheet_2009.pdf 85 U.S. Energy Information Administration (EIA). 2015, March 13. “Total energy subsidies decline since 2010, with changes in support across fuel types.” Retrieved from: http://www.eia.gov/todayinenergy/detail.cfm?id=20352 86 Taxpayers for Common Sense. 2009. “Coal: A Long History of Subsidies.” Retrieved from: http://www.taxpayer.net/images/uploads/downloads/Coal_subsidies_factsheet_2009.pdf

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greater than the fair market value (FMV) set by the BLM.87 A report from the Government Accountability Office in 2013 examined the fair market valuation process conducted by the BLM and, citing a number of reasons such as lack of competition, unsatisfactory consideration of export value, and lack of adherence to regulatory standards, claimed that the BLM fair market valuations may not be accurate. Due to the lack of availability of the valuation process records,

these statements are difficult to accurately quantify.88

One major concern the OIG discusses is the lack of competition in the bidding process for leases. For example, the OIG states that in the past 20 years, 80 percent of coal lease sales in the Powder River Basin, which supplies 40 percent of the nation’s coal, received only one bid. Further, no coal lease has received more than two bids. This federal policy of lease sales, which bases the sale price on a pre-determined FMV price set by the BLM, does not allow for competitive pricing of coal on public lands. It therefore acts as a subsidy by allowing coal producers to mine coal for less than they

would pay in a fair, competitive market.89 This unseen subsidy distorts the market by undervaluing the competitive market value of coal and providing it at a lower cost.

TAX EXPENDITURES

Tax expenditures make up the largest type of federal support for coal-generated electricity, at $779 million in fiscal

year 2013.90 Some tax expenditures allow companies to reduce their tax liability by factoring in the depreciation of equipment (a tax expenditure shared by energy and non-energy related industries). Othersubsidies and tax breaks for coal are aimed at minimizing the environmental impact of using coal for electricity production. For example, Clean Coal Tax Credits--which are an incentive for coal producers to invest in clean coal technology--accounted for $3 billion in

subsidies for the coal industry as of 2009.91

Tax expenditures typically take the form of either a tax deduction or tax credit, each of which artificially lowers the cost of production. Tax deductions are special exemptions and accounting measures that lessen a company’s tax burden by reducing the amount they must pay if they meet specific standards, such as implementing clean coal technology. Deductions allow companies to retain possession of a larger portion of their profits, creating a net revenue loss for the

government, and ultimately taxpayers.92

Tax credits are divided into two categories: non-refundable and refundable. Non-refundable tax credits are redeemable up to the point that they cover tax liabilities, reducing federal revenue without directly affecting other taxpayers. Refundable tax credits, however, allow companies to eliminate tax liabilities and retain any remaining funds from the

credit as revenue. The federal government uses other taxpayers’ money to foot the bill for refundable tax credits.93

87 The Office of Inspector General. 2013, June. “Coal Management Program, U.S. Department of the Interior.” U.S. Department of the Interior. Retrieved from: https://www.doioig.gov/sites/doioig.gov/files/CR-EV-BLM-0001-2012Public.pdf 88 The Government Accountability Office (GAO). 2013, December. “Coal Leasing.” Retrieved from: http://www.gao.gov/assets/660/659801.pdf 89 The Office of Inspector General. 2013, June. “Coal Management Program, U.S. Department of the Interior.” U.S. Department of the Interior. Retrieved from: https://www.doioig.gov/sites/doioig.gov/files/CR-EV-BLM-0001-2012Public.pdf 90 Energy Information Administration (EIA). 2015, March 23. “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2015.” Pg. 11, Retrieved from: http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf 91 Taxpayers for Common Sense. 2009. “Coal: A Long History of Subsidies.” Retrieved from: http://www.taxpayer.net/images/uploads/downloads/Coal_subsidies_factsheet_2009.pdf 92 Batchelder, L. 2009, July 17. “Tax Expenditures: What are they and how are they structured?” Tax Policy Center (TPC). Retrieved from: http://www.taxpolicycenter.org/briefing-book/background/shelters/expenditures.cfm 93 Batchelder, L. 2009, July 17. “Tax Expenditures: What are they and how are they structured?” Tax Policy Center (TPC). Retrieved from: http://www.taxpolicycenter.org/briefing-book/background/shelters/expenditures.cfm

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The Energy Policy Act of 2005 (EPAct) uses both tax deductions and tax credits toencourage the coal industry to invest in technologies that reduce the negative environmental impacts of coal-generated electricity. Under the EPAct, companies can amortize--or gradually write off the initial cost of--mandated pollution control equipmentthrougha tax deduction, and also gain tax credits for investments in clean coal facilities.Of the total 2013 expenditures on coal, the

amortization of pollution control equipment accounted for $400 million.94

The EPAct was thefirst act to authorize clean coal tax credits. The act created two new sections within the Internal Revenue code—one for investments in qualifying advanced coal projects and another for investments in qualifying

gasification projects. The federal government appropriated $1.65 billion to these credits. 95 In 2008, the Energy Improvement and Extension Act (part of the Emergency Economic Stabilization Act) allocated an additional $1.5 billion dollars for these credits. The Energy Improvement and Extension Act also introduced a carbon dioxide sequestration credit. For every metric ton of sequestered carbon dioxide, producers can receive $20. The expected cost of this credit

was estimated to be $1.1 billion by the time the 75 million metric ton limit is reached.96

Another key tax incentive for the coal industry is the reclassification of capital gains income as royalty payments. Because royalty payments do not qualify as income the same way capital gains do, companies pay a reduced tax rate.This practice dates back to 1950 when the U.S. government adopted a tax reclassification that encouraged coal

production. Totaldeductionsfrom this policy amounted to over $1.3 billion between 2000 and 2009.97 Additionally, the policy was valued atabout $90 million in fiscal year 2013, up from about $53 million in fiscal year 2010. This data is

shownin Table 7.98

94 Energy Information Administration (EIA). 2013, March. "Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013." Pg. 12-143-14. Retrieved from: http://199.36.140.204/analysis/requests/subsidy/pdf/subsidy.pdf 95 Internal Revenue Service. 2006, November 30. “$1 Billion in Tax Credits Allocated to Clean Coal Projects.” Retrieved from: https://www.irs.gov/uac/$1-Billion-in-Tax-Credits-Allocated-to-Clean-Coal-Projects 96 Senate Finance Committee. 2008, September 17. “The Energy Improvement and Extension Act of 2008.” Article can be found at: www.finance.senate.gov 97 Pfund, N., & Healy, B. 2011. “What would Jefferson Do?” Pg. 9. Retrieved from: http://www.dblinvestors.com/documents/What-Would-Jefferson-Do-Final-Version.pdf 98 Energy Information Administration (EIA). 2013, March. "Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013." Pg. 13. Retrieved from: http://199.36.140.204/analysis/requests/subsidy/pdf/subsidy.pdf

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Table 7: Approximations of federal coal-related tax expenditures for fiscal years 2010 and 2013 in million 2013 dollars99

Tax Expenditure Fiscal Year 2010 Fiscal Year 2013

Amortization of Certain Pollution Control Facilities

$105 $400

Credit for Investment in Clean Coal Facilities

$253 $180

Capital Gains Treatment of Royalties on Coal

$53 $90

Alternative Fuel Production Credit $179 $10

Other $74 $99

Total $664 $779

In his proposed 2016 budget, President Obama requested $2 billion in tax credits for both new coal and existing coal-fired electricity generation units that use carbon capture technology. To qualify, retrofitted and new plants must capture 75 percent of their total CO2 emissions. The budget would provide two types of tax credits for permanently sequestered CO2. A $50 tax credit would be awarded for every metric ton of permanently sequestered CO2 emissions that are not beneficially reused by the producer, and a $10 tax credit for every metric ton of permanently sequestered CO2 emissions

that is beneficially reused by the producer.100Although this budget has not been passed, it is yet another example of the federal government’s continued attempt to influence the coal industry via tax measures.

GRANTS

Grants given to the coal industry are designed to incentivize the research and development of cleaner and more efficient methods of generating electricity from coal. These grants encourage coal companies to invest in researching clean technology when they may otherwise be reluctant to do so. Federal grants for research and development have

99 Energy Information Administration (EIA). 2013, March. "Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013." Pg. 12-13. Retrieved from: http://199.36.140.204/analysis/requests/subsidy/pdf/subsidy.pdf 100 United States Government. 2015. “The President’s Budget Fiscal Year 2016.” Pg. 5. Retrieved from: https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/fact_sheets/investing-in-coal-communities-workers-and-technology-the-power-plan.pdf

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historically made up the largest share of grants received by the coal industry. From 1950 to 2009, the federal

government granted almost $34 billion in research and development.101

In the late 1980s, the Department of Energy created the Clean Coal Power Initiative (CCPI), which provided funding for new technologiesintended to decrease the environmental impact of coal-burning power plants. In its early years, the CCPI focused on reducing emissions that cause acid rain.By 2000, the federal government broadened the focus of the

CCPI to include coal’s effect on global climate change and human health.102

Between 2003 and 2010, the CCPI provided funding for 18 clean coal projects.103 Of these 18 projects, only 4 were successfully completed. The remaining 14are eitherstill under construction or have been discontinued.104 Since 2003,the federal government has given over $1.8 billion in support to the CCPI.105 Grants such as the CCPI increase the unseen costs of coal-generated electricity by increasing the burden on taxpayers.

FEDERAL ENERGY POLICY AND THE IMPLICIT COSTS OF COAL

Coal electricity's social and environmental costs have spurred federal regulations intended to minimize those impacts. Many policies discourage the use of coal, but just like other forms of electricity generation, coal receives federal support in the form of tax credits and subsidies. These forms of support distort the energy market. Policymakers often overlook the economic consequences of policies intended to both encourage and discourage coal use. Federal interference increases the burden on taxpayers and disguises the actual cost of coal-generated electricity. In estimating the cost of generating electricity from coal, the unseen costs of federal policies, as well as the corresponding social and environmental reasons for enacting those policies, should be considered.

STATE COAL POLICIES

States have also enacted policies that encourage or discourage the production of electricity from coal. These policies represent another implicit, or unseen, cost that should be considered by policymakers.There is no uniform trend among state-level coal policies. In some states, coalgenerates most of the electricity and employs a large portion of the state's workforce. These states tend toenact coal-friendly policies. Other states,usually those that generate low amounts electricity from coal,can pass anti-coal policieswith little political cost and great political gain, often citing thenegative environmental consequences of mining and burning coal as justification.

On average, states with little tono coal-generated electricitypay higher ratesthan states with morecoal generation.

The relationship between high coal use for electricity generation and low electricity prices is shown in Figure 5.106 For example, over 90 percent of the electricity generated in West Virginia, Kentucky, and Wyoming is from coal. These three states, which benefit from in-state coal resources, have some of the lowest rates in the nation, paying between

101 Taxpayers for Common Sense. 2009. “Coal: A Long History of Subsidies.” Pg. 2. Retrieved from: http://www.taxpayer.net/images/uploads/downloads/Coal_subsidies_factsheet_2009.pdf 102 Office of Fossil Energy. Clean Coal Power Initiative. Retrieved June 11, 2015 from: http://energy.gov/fe/science-innovation/clean-coal-research/major-demonstrations/clean-coal-power-initiative 103 Office of Fossil Energy. Clean Coal Power Initiative. Retrieved June 11, 2015 from: http://energy.gov/fe/science-innovation/clean-coal-research/major-demonstrations/clean-coal-power-initiative 104 Office of Fossil Energy. Clean Coal Power Initiative. Retrieved June 11, 2015 from: http://energy.gov/fe/science-innovation/clean-coal-research/major-demonstrations/clean-coal-power-initiative 105 Taxpayers for Common Sense. 2009. “Coal: A Long History of Subsidies.” Retrieved from: http://www.taxpayer.net/images/uploads/downloads/Coal_subsidies_factsheet_2009.pdf 106 Data taken from “Energy Regulation in the States: A Wake-up Call.” Institute for Energy Research. Retrieved from: http://instituteforenergyresearch.org/states/. See Appendix A & B.

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six and seven cents per kilowatt-hour.107 Alternatively, states that do not generate electricity from coal often have much higher prices than do states with greater amounts of coal-power. New York and Connecticut, with electricity prices of 15.66 and 18.21 cents per kilowatt-hour respectively, have the highest electricity prices in the United States

and generate little of their electricity from coal.108

Figure 5: Electricity Rates and Electricity Generation from Coal for 2010109

STATES FIGHTING NEW EPA REGULATIONS

Inexpensive electricity is important for a state's economic health because it is an input for most other goods.110 Many coal-dependent states want to protect coal from federal regulation that they believe will make their state's electricity more expensive. For example, Wyoming, which provides almost 40 percent of the nation’s mined coal, relies on coal

107 Data taken from “Energy Regulation in the States: A Wake-up Call.” Institute for Energy Research. Retrieved from: http://instituteforenergyresearch.org/states/. See Appendix A & B. 108 Data taken from “Energy Regulation in the States: A Wake-up Call.” Institute for Energy Research. Retrieved from: http://instituteforenergyresearch.org/states/. See Appendix A & B. 109 Data taken from “Energy Regulation in the States: A Wake-up Call.” Institute for Energy Research. Retrieved from: http://instituteforenergyresearch.org/states/. See Appendix A & B. 110 Blandford, A. Patrick, A., Peters, L. 2015, March. “The Vulnerability of the United States Economy to Electricity Price Increases.” Pg. 11, 18. Retrieved from: http://energy.ky.gov/Programs/Data%20Analysis%20%20Electricity%20Model/Vulnerability_to_Electricity_Prices.pdf

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for about 11.2 percent of its state revenue.111 According to the Wyoming State Geological Survey, in 2014 coal was the second largest source of revenue for Wyoming’s state and local governments.112

Under the EPA’s Clean Power Plan, Wyoming is required to reduce its carbon dioxide output rate to 56 percent of the

levels recorded in the year 2012 by 2030.113 A 2015 report from the Center for Energy Economics and Public Policy suggests that the EPA’s plan could cause Wyoming's coal production to fall 20 to 45 percent by 2030, resulting in“employment losses approaching 10% inthe Powder River Basin."114

Following the EPA’s announcement of the CPP in August, 2015, Wyoming joined West Virginia and 13 other states in an emergency request that the requirements be held off until after the states have had a chance to challenge the legality of the CPP in court. The emergency petition filed by these 15 states asserts, “Absent an immediate stay, the States are and will continue to be irreparably harmed by the displacement of sovereign priorities and the steps they

must take to begin reordering the way their citizens receive and consume energy.”115

STATES SUPPORTING NEW EPA REGULATIONS

Not all states are opposed to the EPA’s new regulations. A collection of 14 states and two cities, includingNew York,

Illinois, and the District of Columbia, have stated they are willing to defend the CPP in court.116 Eleven of thefourteen

statesuse almost no coal to generate electricity.117 These states are trying to further reduce their dependence on coalas a response to both federal pressure and constituents' concerns about limiting emissions.

California's attorney general was among the 14 state attorneys general that issued a statement supporting the CPP.118 The support for the EPA's new rule is a continuation of environmental regulations in the state placing additional pressure on the coal industry. California has one of the most intensive requirements for generating renewable electricity

in the United States.119 Further, in 2006, California passed the Emissions Performance Standard, which reduced the competitiveness of coal electricity by forbidding long-term investments in baseload coal power plants that do not meet

111 Institute for Energy Research (IER). n.d. “Energy Regulation in the State: A Wake-up Call: Wyoming.” Retrieved from: http://instituteforenergyresearch.org/states/; Godby, R., Coupal, R., Taylor D., Considine, T. 2015, February. "The Impact of the Coal Economy on Wyoming". Center for Energy Economics and Public Policy. Pg. 4. Retrieved from: http://www.uwyo.edu/cee/_files/docs/wia_coal_full-report.pdf 112 Wyoming State Geologic Survey. 2015. “Wyoming Coal.” Retrieved from: http://www.wsgs.wyo.gov/energy/coal 113 Environmental Protection Agency (EPA). 2015, August 3. “Clean Power Plan: State at a Glance: Wyoming.” Retrieved from: http://www3.epa.gov/airquality/cpptoolbox/wyoming.pdf 114 Godby, R.,Coupal, R., Taylor, D., Considine, T. 2015, February. “The Impact of the Coal Economy on Wyoming.” Pg. 7, 93. Center for Energy Economics and Public Policy at University of Wyoming. Retrieved from: http://wyia.org/wp-content/uploads/2015/03/Coal-Impacts-Full-Report-Final-030615.pdf 115 In Re West Virginia, et all. 2015, August 13. “On Petition for Extraordinary Writ to the United States Environmental Protection Agency.” Pg. 2. USCA Case #15-1277. Document #1567765. Retrieved from: http://www.ago.wv.gov/publicresources/epa/Documents/Emergency%20Petition%20for%20writ%20-%20file%20stamped%20%28M0101798xCECC6%29.pdf 116 Volocovici, V. 2015, August 13. "Fifteen U.S. states seek to block EPA carbon rule". Reuters. Retrieved from: http://www.reuters.com/article/2015/08/13/us-climatechange-cleanpower-plan-idUSKCN0QI2D920150813; Schwartz, T. 2015, August 14. "Vermont Joins 16 States And Cities In Announcing Their Intention To Oppose Request For Court Stay Of The Clean Power Rule". Retrieved from: http://ago.vermont.gov/focus/news/vermont-joins-16-states-and-cities-in-announcing-their-intention-to-oppose-request-for-court-stay-of-the-clean-power-rule.php 117 See Appendix B for a list of the states ranked by coal use 118 Volocovici, V. 2015, August 13. "Fifteen U.S. states seek to block EPA carbon rule". Reuters. Retrieved from: http://www.reuters.com/article/2015/08/13/us-climatechange-cleanpower-plan-idUSKCN0QI2D920150813 119 Institute for Energy Research. 2015, March 8. “The Status of Renewable Electricity Mandates in the States.” Pg. 1. Retrieved from: http://instituteforenergyresearch.org/wp-content/uploads/2011/01/IER-RPS-Study-Final.pdf

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minimum requirements for carbon emissions. The law nearly eliminated investments in coal generation facilities

without carbon capture and sequestration within the state.120

Not only are fourteen states advocating for stringent federal regulations of greenhouse gases, but seven of those fourteen, New York, Massachusetts, Connecticut, New Hampshire, Maine, Rhode Island, and Delaware, have also

joined an interstate agreement called the Regional Greenhouse Gas Initiative (RGGI).121 The RGGI attempts to reduce

greenhouse gas emissions in the mid-atlantic and northeastern states through a regional cap-and-trade program.122 The program sets a mandatory limit on CO2 emissions from power plants at the 2009 level, and will reduce the cap by

10 percent between 2015 and 2019.123 Only facilities with the capacity to generate 25 megawatts or more fall under the RGGI's requirements. Between the states in the compact regulations apply to 168 electric power plants.124

Cap and trade policies allow plants to buy and sell allowances for each ton of CO2 emitted in an attempt to reduce

carbon emissions to what pollution producers are willing to purchase.125 This system assumes that pollution will reach optimal levels because emissions allowances will be allocated according to their most highly valued use. The most efficient producers of electricity will buy more permits and produce electricity, while less efficient ones will sell their permits and leave the market.

A report on the economic impact of RGGI by economic consulting firm, the Analysis Group, concludes that CO2 allowances usually result in a short-term increase in retail electricity prices, but that in the long term, electricity prices

fall because states invest in energy efficiency programs to meet the cap on carbon emissions.126 The Analysis Group estimates these reduced electricity rates lead to consumer benefits of the RGGI at $1.1 billion. From the power producer's perspective, however, the Analysis Group also concludes that the RGGI program leads to costs of $1.6

billion—which means that the net effect on states in the RGGI is a loss of slightly over $500 million.127

RENEWABLE PORTFOLIO STANDARDS

One of the most common state policies for encouraging renewable energy use is known as Renewable Portfolio Standards (RPS). These programs mandate that a specific percentage of a state’s electricity be generated from

120 Long, N. 2010, October 18. “California Gets Closer to Closing The Door On Coal.” Natural Resources Defense Council. Retrieved from: http://switchboard.nrdc.org/blogs/nlong/california_gets_closer_to_clos.html; California Energy Commission. n.d. "SB 1368 Emission Performance Standards." Retrieved from: http://www.energy.ca.gov/emission_standards/ 121 Regional Greenhouse Gas Initiative Inc. (RGGI). n.d. "RGGI, Inc.". Retrieved from: http://www.rggi.org/rggi 122 Regional Greenhouse Gas Initiative Inc. 2015. Retrieved from: http://www.rggi.org/ 123 Ruth, M., Gabriel, S.A., Palmer, K.L., Burtraw, D., Paul, A., Chen, Y., Hobbs, B.F., Irani, D., Michael, J., Ross, K.M., Conklin, R., Miller, J. 2008, June. “Economic and energy impacts from participation in the regional greenhouse gas initiative: A case study of the State of Maryland.” Energy Policy, Volume 36, Issue 6, June 2008, Pages 2279-2289. Retrieved from: http://ac.els-cdn.com/S030142150800133X/1-s2.0-S030142150800133X-main.pdf?_tid=c56e6da6-1b5b-11e5-9dbe-00000aacb35f&acdnat=1435251847_98a4e33050402a8010a7d27473ab9619 124 Ramseur, J. 2015, July 2. "The Regional Greenhouse Gas Initiative Lessons Learned and Issues for Congress". Congressional Research Service (CRS). Pg. 2-3. Retrieved from: https://www.fas.org/sgp/crs/misc/R41836.pdf 125 Ruth, M., Gabriel, S.A., Palmer, K. L., Burtraw, D., Paul, A., Chen, Y., Hobbs, B.F., Irani, D., Michael, J., Ross, K.M., Conklin, R., Miller, J. 2008, June. “Economic and energy impacts from participation in the regional greenhouse gas initiative: A case study of the State of Maryland.” Energy Policy, Volume 36, Issue 6, June 2008, Pages 2279-2289. Retrieved from: http://ac.els-cdn.com/S030142150800133X/1-s2.0-S030142150800133X-main.pdf?_tid=c56e6da6-1b5b-11e5-9dbe-00000aacb35f&acdnat=1435251847_98a4e33050402a8010a7d27473ab9619 126Hibbard, P.J., Tierney, S.F., Okie, A.M., Darling, P.G., 2011, November 15. “The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States.” Analysis Group. Pg. 3-4. Retrieved from: http://www.analysisgroup.com/uploadedfiles/content/insights/publishing/economic_impact_rggi_report.pdf 127 Hibbard, P.J., Tierney, S.F., Okie, A.M., Darling, P.G., 2011, November 15. “The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States.” Analysis Group. Retrieved from: http://www.analysisgroup.com/uploadedfiles/content/insights/publishing/economic_impact_rggi_report.pdf

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renewables by a given date. Twenty-nine states, the District of Columbia, and three territories have adopted RPS. Eight states and one territory have renewable portfolio goals, which are not mandatory.128

Figure6:StateswithRPS129

RPS have succeeded in increasing renewable energy use, but they have also increased unemployment, slowed job growth, and increased electricity prices. A recent study by the Institute for Political Economy at Utah State University found that North Carolina’s RPS resulted in 23,769 foregone jobs and $3,870 of foregone household income per family in 2013 alone.130 Likewise, the effect of RPS on Ohio was a loss of 29,366 jobs and a loss of $3,842 per household. The study found no evidence of a net increase in job production or a net savings in income per household as a result of RPS in any of the states examined.131

128 Database of State Incentives for Renewables and Efficiency (DSIRE). 2015, June. "Renewable Portfolio Standard Policies." U.S. Department of Energy (DOE). Retrieved from: http://ncsolarcen-prod.s3.amazonaws.com/wp-content/uploads/2014/11/Renewable-Portfolio-Standards.pdf 129 Database of State Incentives for Renewables and Efficiency (DSIRE). 2015, June. "Renewable Portfolio Standard Policies." U.S. Department of Energy (DOE). Retrieved from: http://ncsolarcen-prod.s3.amazonaws.com/wp-content/uploads/2014/11/Renewable-Portfolio-Standards.pdf 130 Simmons, R., Yonk, R., Brough, T., Sim, K., & Fishbeck, J. 2015, February. “Renewable Portfolio Standards: North Carolina.” Institute of Political Economy, Utah State University. Pg. 11. Retrieved from: http://www.strata.org/wp-content/uploads/2015/03/FINAL-RPS-North-Carolina.pdf 131 Simmons, R., Yonk, R., Brough, T., Sim, K., & Fishbeck, J. 2015, April. “Renewable Portfolio Standards: Ohio”. Institute of Political Economy,

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Renewable Portfolio Standards can also lead to higher electricity prices because they require the use of more expensive renewables instead of conventional sources of electricity.132 In 2010, the Institute for Energy Research (IER) found that states with RPS had electricity rates 38 percent higher than states without.133 A 2012 study by the Manhattan Institute found “a pattern of mostly higher costs in states with RPS mandates,” in which 8 out of 10 states with the highest electricity rates had RPS in place. The report is clear, however, that RPS requirements are not the only reason for rising prices, but that the standards play a role in increasing prices.134 Although these studies fall short of proving causation, the theory is intuitive: mandating the use of more expensive sources of energy will increase the cost of electricity.

Using renewables is cost-effective in some locations. For example, in 2013 Idaho generated 58 percent of its net

electricity from hydropower, while enjoying the fourth lowest electricity rates in the nation.135 Though Idaho does not have an RPS, the state still illustrates that there are certainly cases where renewables make economic sense. Areas with abundant renewable resources may find economical uses of renewable energy, but places that do not are unable to take advantage of renewables in an economically feasible way. Unique conditions exist where renewables are the most economical option, but they are not the norm. Not all places have exploitable renewable resources. Thus, blanket laws enacted without regard to the specific capabilities of states may increase electricity rates.

STATE ENERGY POLICY AND THE IMPLICIT COSTS OF COAL

The state-level regulatory environment for coal is highly varied. The unseen costs of coal are affected by interactions between the availability of in-state coal, public perception, and regulation. In general, states that produce more electricity from coal tend to enact more coal-friendly policies. This helps keep costs low for a state’s electricity consumers and taxpayers. Other states are raising the cost of electricity produced by coal by enacting regulations and subsidies for renewables that are meant to replacecoal.In these states coal's use is being restricted, driving up the cost of producing electricity from coal.

Utah State University. Pg. 3. Retrieved from: http://www.strata.org/wp-content/uploads/2015/06/RPS-Ohio-Report.pdf 132 Institute for Energy Research. 2015, March 8. “The Status of Renewable Electricity Mandates in the States.” Pg.1, 72. Retrieved from: http://instituteforenergyresearch.org/wp-content/uploads/2011/01/IER-RPS-Study-Final.pdf 133 Institute for Energy Research. 2015, March 8. “The Status of Renewable Electricity Mandates in the States.” Pg.1, 72. Retrieved from: http://instituteforenergyresearch.org/wp-content/uploads/2011/01/IER-RPS-Study-Final.pdf 134 Bryce, R. 2012, February. “The High Cost of Renewable-Electricity Mandates.” Center for Energy Policy and the Environment at the Manhattan Institute. Pg. 3. Retrieved from: http://www.manhattan-institute.org/pdf/eper_10.pdf 135 Energy Information Administration (EIA). 2014, July 17. “Idaho: State Profile and Energy Estimates.” Department of Energy (DOE). Retrieved from: http://www.eia.gov/state/?sid=ID

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KEY FINDINGS

Coal is one of the most abundant, affordable, and reliable methods of producing electricity in the United States. Despite its economic benefits, coal also has environmental impacts such as greenhouse gas emissions. Because of coal's environmental impacts, the federal government as well as many state governments have enacted policies that seek to reduce the production of electricity from coal. These policies are often enacted without consideration of the negative economic consequences they will have on American taxpayers and electricity consumers. The implicit, or unseen, costs of policies meant to encourage and discourage production of electricity from coal must be included in the cost of coal energy.

• Policymakers often overlook the economic consequences of policies intended to both encourage and discourage coal use.

• New federal regulations like the Clean Power Plan discourage the production of electricity from coal, which can have both economic costs and environmental benefits, both of which should be considered.

• Like renewables, coal also receives subsidies that distort the energy market, increasing the burden on US taxpayers and driving up the cost of coal-generated electricity.

• States that generate a significant portion of their electricity from coal enjoy lower electricity rates, and tend to oppose stricter federal regulation of coal.

• States with lower levels of electricity generation from coal have enacted regulations to further discourage the use of coal for electricity generation.

Capital Costs Subsidies

O & M Regulations

Capacity Factor Mandates

Transmission Costs Less Reliable Alternatives

Social and Environmental Costs

Explicit Costs + Implicit Costs = The Overall Cost of Coal

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CONCLUSION

Coal is one of the least expensive and most reliable methods of generating electricity today. Because of the environmental impacts of generating electricity from coal, federal and state governments have enacted regulations, subsidies, and mandates that seek to reduce the amount of electricity generated from coal in favor of renewables. These renewable alternatives, however, are often more expensive and less reliable sources of energy.

Government intervention increases the unseen costs of generating electricity from coal. Because these costs are often unseen, this limits the ability of individual consumers to make decisions about electricity. Subsidies, mandates, and regulations burden U.S. taxpayers and electricity consumers with unwanted costs, and discourage innovation in energy technology. If US policymakers were to leave financial resources to market forces instead of attempting to anticipate America's energy needs, taxpayers and electricity consumers alike would benefit.

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APPENDIX A:

STATE COMPARISON BY ELECTRICITY PRICE (LOW TO HIGH)

In-State CoalResources? RPSStandard?

InterstateCompacts? GHGCaps?

Coal Use as %of ElectricityGeneration

AverageElectricityPrice(c/kWh)

Alldataretrievedfrom:http://instituteforenergyresearch.org/states/,accessedSeptember2015

Wyoming Y N N N 91.40% 6.08

Idaho N N N N 0.60% 6.49

Kentucky Y N N N 92.70% 6.5

Washington N Y Y N 7.10% 6.63

WestVirginia Y Y N N 96.30% 6.64

Utah Y N Y N 82.20% 6.78

NorthDakota Y N N N 87.40% 6.81

Oklahoma N N N N 45.50% 7.08

Louisiana N N N N 25.30% 7.16

Nebraska N N N N 69.00% 7.16

Missouri N Y N N 81.00% 7.24

Iowa N Y Y N 72.60% 7.29

SouthDakota N N N N 39.50% 7.35

Montana Y Y Y N 58.60% 7.44

Indiana Y N N N 93.10% 7.48

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Oregon N Y Y Y 5.70% 7.63

Arkansas N N N N 43.60% 7.71

Kansas Y Y Y N 69.90% 8.07

Minnesota N Y Y N 57.20% 8.13

NewMexico Y Y Y N 73.20% 8.2

SouthCarolina N N N N 35.10% 8.28

Colorado Y Y N N 62.70% 8.36

NorthCarolina N Y N N 55.30% 8.43

Tennessee N N N N 52.70% 8.66

Georgia N N N N 54.10% 8.76

Alabama Y N N N 38.90% 8.81

Mississippi N N N N 26.60% 8.83

Virginia Y N N N 37.30% 8.95

Ohio N Y N N 83.70% 8.97

Illinois Y Y Y N 47.10% 9.13

Wisconsin N Y Y N 62.50% 9.35

Arizona Y Y Y Y 35.50% 9.57

Pennsylvania Y Y N N 48.00% 9.6

Michigan N Y Y N 66.70% 9.68

Texas Y Y N N 35.10% 10.18

Nevada N Y N N 19.90% 10.35

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Florida N N N Y 24.90% 11.43

Delaware N Y Y Y 58.10% 12.17

Vermont N Y Y Y 0.00% 12.75

Maine N Y Y Y 0.40% 12.89

Maryland N Y Y Y 55.30% 13.11

California N Y Y Y 1.00% 13.58

RhodeIsland N Y Y Y 0.00% 14.24

NewJersey N Y Y Y 8.60% 14.8

NewHampshire N Y Y Y 14.40% 15.2

Alaska Y N N N 8.70% 15.24

Massachusetts N Y Y Y 24.60% 15.53

NewYork N Y Y Y 9.70% 15.66

Connecticut N Y Y Y 7.90% 18.21

Hawaii N Y N Y 14.10% 31.04

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APPENDIX B:

STATE COMPARISON BY COAL USE (LOW TO HIGH)

In-State CoalResources? RPSStandards?

InterstateCompacts? GHGCaps?

Coal Use as %of ElectricityGeneration

AverageElectricityPrice(c/kWh)

Alldataretrievedfrom:http://instituteforenergyresearch.org/states/

RhodeIsland N Y Y Y 0.00% 14.24

Vermont N Y Y Y 0.00% 12.75

Maine N Y Y Y 0.40% 12.89

Idaho N N N N 0.60% 6.49

California N Y Y Y 1.00% 13.58

Oregon N Y Y Y 5.70% 7.63

Washington N Y Y N 7.10% 6.63

Connecticut N Y Y Y 7.90% 18.21

NewJersey N Y Y Y 8.60% 14.8

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Alaska Y N N N 8.70% 15.24

NewYork N Y Y Y 9.70% 15.66

Hawaii N Y N Y 14.10% 31.04

NewHampshire N Y Y Y 14.40% 15.2

Nevada N Y N N 19.90% 10.35

Massachusetts N Y Y Y 24.60% 15.53

Florida N N N Y 24.90% 11.43

Louisiana N N N N 25.30% 7.16

Mississippi N N N N 26.60% 8.83

SouthCarolina N N N N 35.10% 8.28

Texas Y Y N N 35.10% 10.18

Arizona Y Y Y Y 35.50% 9.57

Virginia Y N N N 37.30% 8.95

Alabama Y N N N 38.90% 8.81

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SouthDakota N N N N 39.50% 7.35

Arkansas N N N N 43.60% 7.71

Oklahoma N N N N 45.50% 7.08

Illinois Y Y Y N 47.10% 9.13

Pennsylvania Y Y N N 48.00% 9.6

Tennessee N N N N 52.70% 8.66

Georgia N N N N 54.10% 8.76

Maryland N Y Y Y 55.30% 13.11

NorthCarolina N Y N N 55.30% 8.43

Minnesota N Y Y N 57.20% 8.13

Delaware N Y Y Y 58.10% 12.17

Montana Y Y Y N 58.60% 7.44

Wisconsin N Y Y N 62.50% 9.35

Colorado Y Y N N 62.70% 8.36

Michigan N Y Y N 66.70% 9.68

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Nebraska N N N N 69.00% 7.16

Kansas Y Y Y N 69.90% 8.07

Iowa N Y Y N 72.60% 7.29

NewMexico Y Y Y N 73.20% 8.2

Missouri N Y N N 81.00% 7.24

Utah Y N Y N 82.20% 6.78

Ohio N Y N N 83.70% 8.97

NorthDakota Y N N N 87.40% 6.81

Wyoming Y N N N 91.40% 6.08

Kentucky Y N N N 92.70% 6.5

Indiana Y N N N 93.10% 7.48

WestVirginia Y Y N N 96.30% 6.64

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APPENDIX C:

COMPARATIVE ANALYSIS OF TAX CODE PROVISIONS RELATED TO ENERGY PRODUCTION

By: Jonathan E. Jenkins, JD, LLM

1. ABSTRACT

This note aggregates sections of the Internal Revenue Code and comparative studies of federal tax policy towards energy production, and answers the question about whether tax policy treats equally all sources of energy production (coal, oil, natural gas, wind, solar, etc.). Tax policy does not treat all energy sources equally, but instead, during the past ten years, federal tax policy has shifted to give greater tax preferences to renewable energy sources over fossil fuels. Congressional Budget Office (CBO) estimates show significantly more tax expenditures for renewable energy than for fossil fuels during the years 2008-2011, by ratio of approximately four to five times greater.136 A graph prepared by the CBO illustrates the estimated tax expenditures/preference by the type of fuel or technology (see the CBO graph attached at the end of this note as Exhibit A).

2. BRIEF HISTORY OF TAX INCENTIVES FOR ENERGY PRODUCTION

“The Internal Revenue Code (I.R.C.) has been intimately linked to tax subsidies for investment, development, and production of American energy sources for much of this nation’s history. The same year that Congress adopted the federal income tax in 1913, it also passed legislation permitting oil companies to receive a subsidy for depleting an oil-based resource.”137

“In contrast to the first traditional energy tax subsidies in 1913, Congress passed the first renewable energy tax credits in 1978,138 likely as a response to the energy crisis of the late 1970s.139 From 1978 until 2015, Congress created new incentives, extended existing incentives, and renewed expired incentives for renewable energy.”140 In December 2015, as part of the spending bill for the 2016 federal budget, Republicans in Congress agreed to extend the tax incentives for renewable energy, which would lapse, in exchange for an agreement with the Obama Administration and Democrats to end the four decade long ban on the export of US produced crude oil.141 This note does not identify or discuss special

136 Congressional Budget Office. Federal Financial Support for Fuels and Energy Technologies. Testimony before U.S. House of Representatives, Subcommittee on Energy (March 2013). 137 Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845 (2015) (Quoting Mona L. Hymel, Environmental Tax Policy in the United States: A “Bit” of History, 3 Ariz. J. Envtl. L. & Pol’y 157, 159 (2013)). 138 The first legislation creating tax credits for renewable energy was the Energy Tax Act of 1978, Pub. L. No. 95-618, 92 Stat. 3174 (1978). Hymel, supra note 1, at 160. 139 See Hymel, supra note 2, at 160. 140 In 2005, Congress passed the Energy Tax Incentives Act of 2005, Pub. L. No. 109-58, 119 Stat. 986 (2005). In 2008, Congress passed the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765 (2008) (codified at 12 U.S.C.§§5201-61). In 2009, Congress passed the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009). In 2012, Congress passed the American Taxpayer Relief Act of 2012. Hymel, supra note 2, at 160 n.11-13; Database of State Incentives for Renewables and Efficiency (hereainfter “DSIRE”), Federal Incentives/for Renewables & Efficiency: Modified Accelerated Cost-Recovery System (Jan. 1, 2013), available at: http://www.dsireusa.org/; American Taxpayer Relief Act of 2012, Pub. L. 112-240, 126 Stat. 2313 (2012), and see, 141 Associated Press. “Congress OKs ‘16 Budget, Tax Breaks, Even Sledding.” Denver Post [Denver] 17 Dec. 2015, sec. A: 20. Print.

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appropriations or spending measures made by Congress (i.e., “pork”), because those are beyond the practical spoke of this note. For example, part of the $1.1 trillion spending bill to fund the federal government for the 2016 budget included a provision, at the request of Senator Thad Cochran (Republican, Mississippi), for an appropriation of “at least $160 million to a financially troubled ‘clean coal’ power plant” located in Kemper County, Mississippi.142 Identifying all such special appropriations is not feasible.

Most subsidies to fossil fuels were written into the U.S. Tax Code long ago as permanent provisions, while subsidies for renewables are time-limited initiatives implemented through energy bills that have set expiration dates.143 The expiration dates built into short term renewable subsidies, lasting one or two years, and this short term expirations create an unstable investment environment for renewable energy. The short term nature of these subsidies has the effect of discouraging long term investment into renewable energy.144

An overlap of tax incentives exists among fossil fuels, and also among renewable energies, so it is not always possible to allocate the value of the annual subsidy for a specific energy industry, such as coal or wind.145 Some subsidies though are industry specific, and are noted below.

3. COAL

3.1 CREDIT FOR PRODUCTION OF NONCONVENTIONAL FUELS

(annual subsidy: $14 billion)

I.R.C. 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.146

3.2 CHARACTERIZING COAL ROYALTY PAYMENTS AS CAPITAL GAINS

(annual subsidy: $986 million)

I.R.C. 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.147

142 Id. 143 “Federal Coal Subsidies.” SourceWatch. The Center for Media and Democracy, 9 July 2014. Web. 03 Mar. 2016. 144 See Harrison, supra note 2, at 861-66. 145 See, e.g., Oil Change International. Cashing In on All of the Above: U.S. Fossil Fuel Production Under Obama. July 2014. 146 “Federal Coal Subsidies.” SourceWatch. The Center for Media and Democracy, 9 July 2014. Web. 03 Mar. 2016. 147 Id. (Quoting the 2011 report, “What Would Jefferson Do?: The Historical Role of Federal Subsidies in Shaping America’s Energy Future” calculated this subsidy totaled over $1.3 billion in government tax expenditures from 2000 – 2009).

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3.3 EXCLUSION OF ALTERNATIVE FUELS FROM FUEL EXCISE TAX

(annual subsidy: $343 million)

I.R.C. 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, liquid coal, and liquid hydrocarbon from biomass.148

3.4 OTHER-FUEL EXPLORATION & DEVELOPMENT EXPENSING

(annual subsidy: $342 million)

I.R.C. 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.149

3.5 OTHER-FUEL EXCESS OF PERCENTAGE OVER COST DEPLETION

(annual subsidy: $323 million)

I.R.C. Section 613. Taxpayers may deduct 10 percent of gross income from coal production.150

3.6 CREDIT FOR CLEAN COAL INVESTMENT

(annual subsidy $186 million)

I.R.C. 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.151

3.7 SPECIAL RULES FOR MINING RECLAMATION RESERVES

(annual subsidy $159 million)

I.R.C. 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.152

148 Id. 149 Id. 150 Id. 151 Id. 152 Id.

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3.8 CARBON DIOXIDE (CO2) SEQUESTRATION CREDIT

($0 in 2009, $60 million in 2013, for both coal and oil combined)

Tax credit of $20 per ton of CO2 sequestered (largely from coal plants); $10 per ton for CO2 used for enhanced oil recovery.153

3.9 BLACK LUNG DISABILITY TRUST FUND

(total subsidy $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 the Environmental Law Institute (ELI) tabulated as a subsidy to coal.154

3.10 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.155

4. OIL AND NATURAL GAS

Estimates for annual tax expenditures for oil and natural gas production are often grouped together, since those tax expenditures come from the same sections of the I.R.C., and because the extraction methods are similar. Total oil and gas subsidies are estimated at $5.3 billion in 2009, and $10.5 billion in 2013.156

4.1 MASTER LIMITED PARTNERSHIPS (MLP)

($2.3 billion in 2009, and $3.9 billion in 2012)

More than three-quarters of MLPs are fossil fuel companies.157 The MLP is a complicated and creative tax avoidance structure.158 “[The MLP] ‘is a business structure that is taxed as a partnership, but whose ownership interests are

153 Id. 154 Id. 155 “Federal Coal Subsidies.” SourceWatch. The Center for Media and Democracy, 9 July 2014. Web. 03 Mar. 2016. 156 Cashing In on All of the Above: U.S. Fossil Fuel Production Under Obama. July 2014. 157 Id. 158 The explanatory discussion in this section comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies

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traded on a market like corporate stock.’159 Instead of a typical corporate structure - investors, managers, and officers - an MLP’s members resemble more closely a partnership and are split into two categories: limited partners, who usually hold ninety-eight percent of the enterprise but have no control in the MLP’s operation, and general partners, who hold a two percent ownership stake in the enterprise and oversee the MLP’s operation.160 Similar to forming one’s business as a corporation, an MLP seeks investors and promises to reward them with dividends from the company’s profits following investment. Unlike a corporation, however, if particular conditions are met, then the MLP is be treated as a partnership instead of a corporation.161 This means that the entity’s income is only taxed once, on the dividends it gives out to its investors. Thus, MLPs provide many of the same benefits of incorporation without the added double tax liability. The result is more money saved and, thus, more money for an MLP’s investors in the form of dividends. Only businesses that fall under a categorical exception162 may take advantage of all that an MLP structure provides. The default position of the I.R.C. is to treat MLPs as corporations.163 However, if ninety percent of an MLP’s gross income comes from a qualifying source, the I.R.C. treats the MLP as a partnership.164 Qualifying sources include interest-based income, real property rents,165 and, most importantly, ‘income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource […]’166 Ultimately, if an oil and gas producing taxpayer structures its business as an MLP, the taxpayer may avoid corporate double taxation and instead give that money to its investors. The current market capitalization of MLPs is nearly $ 490 billion.”167

4.2 INTANGIBLE DRILLING COSTS (IDC)

(Estimated between $43 billion and $55 billion during 1968-2000, $1.6 billion in 2009, $3.5 billion in 2013)

This expenditure provides a 100% tax deduction for costs not directly part of the final operating oil or gas well (such as labor costs, survey work, and ground clearing, including oil and gas exploration and development costs.)168 The value of the IDC between 1968 and 2000 was between forty-three and fifty-five billion dollars in lost revenue.169

Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 855-56 (2015). 159 For instance, the I.R.C. states that, for corporations in general, “[a] tax is hereby imposed for each taxable year on the taxable income of every corporation.” I.R.C. § 11(a) (2012). Partnerships, a taxable entity that will be discussed, infra, are another type of taxable entity that receives unique treatment under the I.R.C.. However, a type of partnership that specifically targets oil and gas companies is best understood as a subsidy and will be treated in the following section about subsidies. See U.S. Sen. Chris Coons, The Master Limited Parity Partnership Act 1 (Apr. 24, 2013), available at http://coons.senate.gov/download/mlp-white-paper/ (explaining that Master Limited Partnerships are traded on the market like a corporate organization but only taxed at the lower level of a partnership). 160 Id. 161 See I.R.C. § 701 (2012) (stating that, in partnerships, partners owe taxes in their individual capacities, not the partnerships in their capacities as entities). 162 See I.R.C. § 7704(c) (2012). 163 I.R.C. § 7704(a) (2012). 164 I.R.C. § 7704(c) (2012). 165 I.R.C. § 7704(d)(1) (2012). 166 I.R.C. § 7704(d)(1)(E) (2012) 167 Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 855-56 (2015). 168 Id. 169 U.S. Gov’t Accountability Office, Tax Incentives for Petroleum and Ethanol Fuels 7-9 (2000), available at http://www.gao.gov/new.items/rc00301r.pdf. See also, Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 855-56 (2015).

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4.3 ENHANCED OIL RECOVERY CREDIT (EORC)

($1 billion between 1990 and 2000) 170

“This subsidy171 covers expenses related to oil and gas in hard-to-drill areas and nearly dry wells in addition to oil and gas wells that are particularly difficult to drill.172 As a result, the EORC ‘encourages oil companies to go after reserves that are more expensive to extract, like those that have been nearly depleted or that contain especially thick crude oil.’173 The EORC awards taxpayers a credit for any taxable year in an amount equal to fifteen percent of the taxpayer’s qualified enhanced oil recovery costs for such taxable year.174 Qualified costs include the IDC costs detailed above, expenses exceeding those costs that are integral parts of the project incurred in an attempt to extract more oil (tertiary injectant expenses), and depreciation of tangible property.175 Certain restrictions and limitations apply to the EORC as well,176 and the EORC is only available to parties who have an operating mineral interest in the property.”177

4.4 NONCONVENTIONAL SOURCE CREDIT (NSC)

($11 billion between 1980 and 2000)178

“In general,179 the NSC provides an incentive for taxpayers to produce oil and gas domestically from sources that typically require more investment to extract oil and gas.180 The difficult-to-drill sources include “oil from shale and tar sands, gas from geopressured brine, Devonian shale, coal seams, [and] tight formations.”181 The NSC gives a three dollar-per-barrel credit, which is adjusted for inflation and may be reduced if the market cost of oil per barrel increases above a predetermined price.

170 U.S. Gov’t Accountability Office, Tax Incentives for Petroleum and Ethanol Fuels 9-13 (2000), available at http://www.gao.gov/new.items/rc00301r.pdf. 171 Discussion in this section comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 854-55 (2015). 172 I.R.C. § 43 (2012). 173 Mark Zepezauer, Take the Rich Off Welfare 3, 119 (2nd ed. 2004). 174 I.R.C. § 43(a) (2012). 175 Mona L. Hymel, Environmental Tax Policy in the United States: A “Bit” of History, 3 Ariz. J. Envtl. L. & Pol’y 157, 171 (2013); I.R.C. § 43(c) (2012). 176 I.R.C. § 43(b) (2012) (detailing a pro-rated credit if the price of the oil is above a certain price per barrel); I.R.C.§§43(c)(2)(A) (2012) (detailing that a party must domestically produce a significant increase in amount of crude oil recovery), 43(d) (detailing that a taxpayer must also reduce the otherwise deductible or capitalizable costs). 177 Enhanced Oil Recovery Credit, 57 Fed. Reg. 54,919, 54,920 (Nov. 23, 1992) (codified at 26 CFR pt. 1, 601). 178 U.S. Gov’t Accountability Office, Tax Incentives for Petroleum and Ethanol Fuels 9-13 (2000), available at http://www.gao.gov/new.items/rc00301r.pdf. 179 Discussion from this section comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 854-55 (2015). 180 I.R.C. § 45K (2012). 181 In determining what constitutes taxable income, the I.R.C.’s congressional underpinnings play a large part in what amounts to a series of political, accounting, economic, and social considerations. See Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts §§ 2.1, 27.6. (2012) (“The statutory base is ‘taxable income,’ a term whose content not only reflects accounting principles and economic concepts but also embodies numerous legislative judgments about fairness, administrative convenience, and the desirability of encouraging or not impeding a host of social, personal, and business activities.”).

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4.5 LOST/REDUCED ROYALTIES FROM LEASING

($2.2 billion in 2009, and again in 2013)

Lost/reduced royalties from leasing of federal lands for onshore and offshore drilling.182

4.6 PERCENTAGE DEPLETION ALLOWANCE

($340 million in 2009, $900 million in 2013)

Independent producers can deduct 14-15% of large investment costs from income taxes. “Percentage depletion allows the firm to deduct a fraction of the revenue arising from sale of the resource. Historic percentage depletion rates have been as high as 27.5%. Currently percentage depletion is allowed for independent producers at a 15% rate for oil and gas and 10% for coal.183 Percentage depletion is allowed on production up to 1,000 barrels of average daily production of oil (or its equivalent for natural gas). In addition, the depletion allowance cannot exceed 100% of taxable income from the property (50% for coal) and 65% of taxable income from all sources.184 Despite the curtailed availability of percentage depletion, it continues to be a significant energy tax expenditure, costing $3.2 billion over five years in the federal budget.”185

4.7 DOMESTIC MANUFACTURING DEDUCTION

($605 million in 2009, $574 million in 2013)

Allows oil producers to claim a tax break intended for U.S. manufacturers to prevent job outsourcing.186

4.8 EXEMPTION FROM PASSIVE LOSS LIMITATION

($20 million in 2009, $20 million in 2013)

Exempts investors from limits on deductions of losses from oil and gas activities in which they are not directly involved.187

182 Oil Change International. Cashing In on All of the Above: U.S. Fossil Fuel Production Under Obama. July 2014. 183 Id. “Independent producers are defined as producers who do not engage in refining or retail operations. EPACT increased the amount of oil a company could refine before it was deemed to engage in refining for this purpose from 50,000 to 75,000 barrels per day.” 184 Id. “Amounts in excess of the 65% rule can be carried forward to subsequent tax years. The net income limitation has been suspended in years past but the suspension lapsed as of this year.” 185 Gilbert E. Metcalf. Federal Tax Policy Towards Energy. The MIT Joint Program on the Science and Policy of Global Change. January 2007. 186 Oil Change International. Cashing In on All of the Above: U.S. Fossil Fuel Production Under Obama. July 2014. 187 Id.

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4.9 DEDUCTION FOR TERTIARY INJECTANTS

($0 in 2009, $7 million in 2013)

Allows companies to deduct the costs of fluids, gases, and other chemicals used for enhanced oil recovery from existing wells.188

4.10 DEEP GAS AND DEEP WATER PRODUCTION ROYALTY RELIEF

($1 million in 2009, $1 million in 2013)

Suspension of royalty payments for deepwater oil and gas production.189

4.11 DEDUCTION FOR OIL SPILL REMEDIATION COSTS

($679 million in 2011, with a spike of $9.9 billion in 2010)

This deduction allows companies to deduct from tax payments the costs associated from cleaning up oil spills. In 2010, an extraordinary spike occurred with the claim of this deduction, because of the British Petroleum Deepwater Horizon oil spill in the Gulf of Mexico.190

4.12 THE LOW INCOME HOME ENERGY ASSISTANCE PROGRAM

(annual subsidy $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 [mostly natural gas]. 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.”191

5. WIND AND SOLAR

Estimates for annual tax expenditures for wind and solar renewable energy production are often grouped together, since those tax expenditures come for the same sections of the I.R.C..

188 Id. 189 Id. 190 Id. Joint Committee on Taxation score of H.R. 3852 of the 112th Congress bill to amend the Internal Revenue Code of 1986 to disallow a deduction for amounts paid or incurred by a responsible party relating to a discharge of oil as cited by Senator Bernie Sanders, End Polluter Welfare Act list of current subsidies, 2012, http://www.sanders.senate.gov/imo/media/doc/EPW_Act_Section_by_Section.pdf , and see, Russ Britt, “BP taking $10 Billion Tax Credit from Gulf Spill”, The Wall Street Journal, July 27, 2010. 191 Id.

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5.1 MODIFIED ACCELERATED COST-RECOVERY SYSTEM (MACRS)

I.R.C. Section 168. This incentive, 192 “permits businesses to recover investments in certain property through depreciation deductions at a faster rate than otherwise permissible under the IRC’s standard depreciation deduction.193 The relevant qualifying properties include a variety of solar technologies and small-scale wind turbines.194 For example, the MACRS allowance permits a business to purchase solar or small-scale wind technology that would normally depreciate over a lifetime of five to ten years, and instead deduct its depreciation over five years.195 Additionally, the 2012 extension of the MACRS deduction extends a bonus depreciation, which “allows industrial and commercial businesses to recover investment in, among other renewables, solar and wind and deduct a depreciation allowance up to 50 percent in the first year that the equipment is purchased and placed into service,”196 as long as it was purchased between 2008 and 2012.”197

5.2 PRODUCTION TAX CREDIT

($18 billion between 1992 and 2015) 198

I.R.C. Section 45. This incentive,199 “allows taxpayers to receive a credit on their taxes for the electricity that they produce from qualifying renewable energy technology and sell to unrelated parties.200 It is ‘a per-kilowatt-hour tax credit for electricity generated by qualified energy resources and sold by the taxpayer to an unrelated person during the taxable year.’201 Unlike the MACRS, which primarily allows a party to deduct the purchased renewable energy technology’s depreciated value from their taxes and thus pay fewer taxes on the technology, the PTC benefits parties who produce and sell electricity with their renewable energy technology by giving the taxpayer a credit on their income taxes. The PTC is available for any scale wind project, but not for solar energy production.202 This restriction against solar panels may be due to the disturbance that a production tax credit’s application could have on a taxpayer’s income tax burden as well as on the utility industry. Because residential scale solar energy production is becoming increasingly feasible and popular across the country,203 tax credits for electricity production by owners of small-scale solar panels would disadvantage utility competitors and reduce individual homeowners’ income tax burdens. A taxpayer who wishes to produce and receive a tax credit for wind power must follow certain conditions. First, according to the most recent legislation passed in January 2013, a wind developer must begin construction on the project prior to January 1, 2014 in order to receive a tax credit.204 Second, a PTC-eligible facility only qualifies if it is within its first ten years of

192 Discussion in this section comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 857-58 (2015). 193 I.R.C. § 168 (2012). 194 I.R.C. § 168(e)(3)(B)(vi) (2012). 195 Id. 196 Wang Mingyuan, Government Incentives to Promote Renewable Energy in the United States, 24 Temp. J. Sci. Tech. & Envtl. L. 355, 362 (2005); see DSIRE; and see American Taxpayer Relief Act of 2012, Pub. L. 112-240, 126 Stat. 2313 (2012). 197 Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 857-58 (2015). 198 Impact of Tax Policies on the Commercial Application of Renewable Energy Technology: Hearing Before the H. Comm. on Science, Space, and Technology, Subcomm. on Investigations and Oversight & Subcomm. on Energy and Environment, 112th Cong. 3 (2012) (statement of Molly Sherlock, Specialist in Public Finance), available at http://.house.gov//.science.house.gov////-SY21-WState-MSherlock-20120419.pdf at 3. 199 Discussion in this section also comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 857-58 (2015). 200 I.R.C. § 45. 201 See DSIRE; and see American Taxpayer Relief Act of 2012, Pub. L. 112-240, 126 Stat. 2313 (2012). 202 See I.R.C. § 45 (2012) (omitting solar as a qualifying energy source). 203 Shayle Kann et al., Solar Market Insight Report 2014 Q1, at 3 (Solar Energy Indus. Ass’n 2014). 204 Melissa Powers, Sustainable Energy Subsidies, 43 Envtl. L. 211, 222 at n54 (2013), see also I.R.C. § 45(d)(1) (2012) (limiting the production

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operation.205 If a wind farm meets both conditions, once the wind farm begins to produce wind energy, the taxpayer is eligible for a tax credit - currently 2.2 cents per kilowatt-hour - for each kilowatt of electricity the facility delivers to the grid.206

5.3 THE RENEWABLE ENERGY INVESTMENT TAX CREDIT (ITC)

($2.7 billion between 2011 to 2015)207

I.R.C. Section 48. This incentive is smaller than PTC.208 The ITC209 permits “businesses and energy producers to deduct up to thirty percent of the cost of purchasing solar and small-scale wind technology (less than 100kW), but not large-scale wind technology.210 The ITC historically represented a smaller loss of tax revenue, compared to the PTC. […] Although some of these parties would be glad to receive a tax credit for potential investments in large-scale wind, the thought of making it easier for competitors to enter the electricity market would result in significant pushback from utilities and the producers of traditional energy sources. Although the ITC does not apply to the full range of renewable energy technology, its benefits are numerous. Unlike the PTC, the ITC does not require the purchaser to produce any electricity to earn the credit.211 Additionally, the Tax Code does not limit how many credits a taxpayer may receive in a taxable year for purchasing solar and wind technology.212 However, the ITC has its disadvantages. For example, it explicitly disallows companies to elect the ITC for property for which, in the same taxable year or in prior taxable years, they elected the PTC.213 In other words, for renewable energy technology that produces electricity, a party cannot in the same year deduct the cost of purchasing the technology and receive a tax credit for producing renewable energy. The qualifying investments under the ITC include costs such as ‘installation costs and the cost for freight incurred in construction of the specified energy property.’214 Absent an exemption from the restriction on deducting capital

tax credit to those facilities whose construction begins prior to January 1, 2014); U.S. Internal Revenue Serv., Notice 2013-29 (2013) 205 Powers at 222, see also I.R.C. § 45(a)(2)(A)(ii) (2012) (limiting the credit for the first ten years of the operation of a facility). 206 Powers, at 222, see also 26 I.R.C. § 45(b)(2) (2012) (credit and phase-out adjustment based on inflation). 207 Impact of Tax Policies on the Commercial Application of Renewable Energy Technology: Hearing Before the H. Comm. on Science, Space, and Technology, Subcomm. on Investigations and Oversight & Subcomm. on Energy and Environment, 112th Cong. 3 (2012) (statement of Molly Sherlock, Specialist in Public Finance). 208 Discussion in this section also comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 859-61 (2015). 209 I.R.C. § 48. See generally DSIRE. 210 I.R.C.§§48(a)(1)-(2) (2012) (percentage deduction and duration of credit); I.R.C. § 48(a)(3)(A)(i) (2012) (solar energy); I.R.C. § 48(a)(3)(A)(vi) (2012) (small wind energy). Large-scale wind investment is likely not included in the ITC for political and economic reasons. It is unlikely that coal and gas companies would permit Congress to heavily subsidize investments in large-scale wind technology because more investment in wind technology would lead to less coal and gas investment. In addition, large-scale wind technology paired with the PTC makes wind technology investments cost competitive with subsidized natural gas. But, in line with the Note’s central theme, wind technology being cost competitive is insufficient because it does not fully incentivize the adoption of renewable energy. 211 Erin Dewey, Sundown and You Better Take Care: Why Sunset Provisions Harm the Renewable Energy Industry and Violate Tax Principles, 52 B.C. L. Rev. 1105, 1116-17 (2011). 212 See DSIRE. 213 “Such term shall not include any property which is part of a facility the production from which is allowed as a credit under section 45 for the taxable year or any prior taxable year.” I.R.C. § 48(a)(3). 214 Howard Cooper, PTCs, ITCs and Section 1603 Grants: Compare and Contrast, U.S. P’ship for Renewable Energy Fin. (Feb. 2011), available at http://reffwallstreet.com/us-pref/wp-content/uploads/2011/06/PTC-ITC-and-Section-1603-Grants-v2.2.pdf

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expenditures, however, the ITC does not include all potential project costs such as the cost of land, buildings, certain land improvements,215 siting the technology,216 and connecting transmission lines to the grid.”217

6. QUANTITATIVELY DE MINIMIS TAX EXPENDITURES

The following tax provisions are viewed as tax expenditures by the staff of the United States Congress, Joint Committee on Taxation,218 but these expenditures are not itemized or quantified in federal reports, because the estimated revenue losses for fiscal years 2013 through 2017 are below the de minimis amount ($50 million/year):

• Credit for producing oil and gas from marginal wells (I.R.C. 45I)

• Credit for producing fuels from a nonconventional source (I.R.C. 45K)

• Seven-year MACRS Alaska natural gas pipeline (I.R.C. 168(e)(3)(C))

• 50-percent expensing of cellulosic biofuel plant property (I.R.C. 168(1))

• Partial expensing of investments in advanced mine safety equipment (I.R.C. 179E)

• Expensing of tertiary injectants (I.R.C. 193)

215 Id. 216 See Shalini P. Vajjhala, Siting Renewable Energy Facilities: A Spatial Analysis of Promises and Pitfalls, Res. for the Future, 2-3 (July 2006), available at http://www.rff.org/rff/Documents/RFF-DP-06-34.pdf 217 Compare I.R.C.§§48(a)(3)(A)-(B), referring only to equipment technology and construction, with the interpretation of intangible drilling costs to include all costs reasonably related to drilling wells. 218 U.S. Congress Joint Committee on Taxation (2013). Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017. (USGPO Publication No. 78-317 JCS-1-13) Washington, DC: USGPO.

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EXHIBIT A