SENATOR BYRD AND THE COSTS OF COAL

New report claims coal costs W.Va. taxpayers money
Vicki Smith, June 22, 2010 (Bloomberg BusinessWeek)

THE POINT
In the last year of his life, Senator Robert C. Byrd (D-WV) taught, not for the first time, the most important lesson of his long and storied public service.

Senator Byrd’s career demonstrates it is possible to – with integrity – change a publicly held position. In Byrd’s case there was in fact more integrity because he found the courage decades ago to reverse his racist position on segregation, denounce his affiliation with the Ku Klux Klan and become one of the stalwart defenders of civil rights.

In December 2009, Senator Byrd made an equally profound shift. After fighting his entire life on behalf of West Virginia’s coal industry, he concluded in December 2009 that he and his state must prepare to move on. In Coal Must Embrace the Future, Byrd wrote “Change is no stranger to the coal industry. Think of the huge changes which came with the onset of the Machine Age in the late 1800’s. Mechanization has increased coal production and revenues, but also has eliminated jobs, hurting the economies of coal communities. In 1979, there were 62,500 coal miners in the Mountain State. Today there are about 22,000… [C]hange is undeniably upon the coal industry again…”

Senator Byrd called for “…an open and honest dialogue about coal’s future in West Virginia…” After assuring his coal industry constituency that no “…effort to do away with the coal industry could ever succeed in Washington because there is no available alternative energy supply that could immediately supplant the use of coal for base load power generation in America…” he went on to warn them that to “…be part of any solution, one must first acknowledge a problem. To deny the mounting science of climate change is to stick our heads in the sand and say “deal me out.” West Virginia would be much smarter to stay at the table.”

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Though Senator Byrd did not have The Impact of Coal on the West Virginia State Budget, from Downstream Strategies, to base his remarks on, he certainly could see what was then quite evident and what the report makes abundantly clear. West Virginia’s economically accessible coal supply is dwindling and the costs of being a coal supplier are going up. The report calculates that when all the costs are compared with the benefits, coal costs West Virginia more –$97.5 million more in 2009 – than it benefits the state.

The benefits are obvious: Direct and indirect jobs in the tens of thousands and tax revenues in the hundreds of millions. The costs are less obvious and often go uncalculated. For instance, the total tax revenues related to the coal industry’s direct jobs in 2009 was ~$125.5 million but the state expenditures in support of those jobs was ~$125.9 million.

On the whole, it is true that the coal industry still generates a lot of money for West Virginia. But when things like the compromised health and work injuries that come from working in the industry and things like the wear and tear on the state's roads and infrastructure are paid off, the state comes out a loser from hosting its coal industry.

In this season of graduations, it is worth noting that while so-called smart people continue to sneer that the New Energies can never be big enough to replace the Old and Dirty Energies, Senator Byrd showed that it is never too late to learn. Now that he has gone to his final graduation, perhaps it is time for his beloved state to pay close attention to his last strong advice about coal:

“The future of coal and indeed of our total energy picture,” Byrd, one of West Virginia’s greatest champions, wrote, “lies in change and innovation. In fact, the future of American industrial power and our economic ability to compete globally depends on our ability to advance energy technology…West Virginians can choose to anticipate change and adapt to it, or resist and be overrun by it. One thing is clear. The time has arrived for the people of the Mountain State to think long and hard about which course they want to choose.”

Lots of red ink. (click to enlarge)

THE DETAILS
The report is based on compiled West Virginia (WV) budget data, estimated tax revenues, and budget expenditures for Fiscal Year 2009 (July 1, 2008 to June 30, 2009).

WV’s Northern and Central Appalachia coal basins produce ~one-third of U.S. coal. In 2008, the state produced ~164 million tons of coal and employed 22,493 miners, managers, and upper-level staff. Five counties produced 50+% of the state’s coal.

Production levels fluctuate but WV's peak output was 177.5 million tons in 1997. It fell off 11% through 2007 before 2008’s slight uptick. Underground production has fallen 25% but the generally less expensive surface mining has increased 20%.

While coal is already costing WV more than it brings in, coming changes are likely to make coal even more costly.

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Factors that are likely to make coal less cost-competitive: (1) The depletion of the lowest-cost reserves, (2) implementation of the Clean Air Interstate Rule, (3) climate legislation that prices greenhouse gas emissions (GhGs), (4) tighter restrictions on mercury emissions, (5) regulations of coal ash and other combustion wastes, and (6) pending restrictions on the valley fills that make mountaintop removal mining especially environmentally abhorrent.

Net impact of the coal industry and employees on West Virginia without consideration of tax expenditures or impacts of indirect coal industry employment: +$193.2 million.

Complete estimate of coal’s net impact on WV in FY 2009 including tax expenditures and indirect impacts: -$97.5 million.

Direct revenues from West Virginia’s coal industry: The payment of taxes and fees to the state’s General Revenue Fund and State Road Fund was ~$307.3 million (the coal severance tax, corporate net income tax, business franchise tax, and other taxes). This was ~8% of the General Revenue Fund and less than 1% of the State Road Fund.

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State budget direct expenditures for West Virginia’s coal industry: ~$113.7 million for FY 2009, spent entirely because of the coal industry and paid for with general revenue and state road funds. Examples: Units of government within the Department of Commerce and Department of Environmental Protection and expenditures for the repair of the state’s coal haul roads.

Net benefit to WV from direct jobs and budget expenditures (FY 2009): + ~$193.6 million.

Direct WV off-budget expenditures for the coal industry (FY 2009): ~$173.8 million, in the form of foregone revenues from the tax exemptions, credits, and reduced or preferential tax rates that reduce the money available for other government programs and services.

Revenues from direct and indirect jobs (FY 2009): 21,012 West Virginia residents were directly employed by coal. Tax revenues from those jobs were ~$125.5 million. There was also about ~$167.9 million in state revenues from indirect coal industry jobs.

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Expenditures from direct and indirect jobs (FY 2009): Supporting the direct jobs cost the state ~$125.9 million. Supporting the indirect jobs cost the state ~$284.8 million.

The net loss to West Virginia on direct jobs in FY 2009 was $0.4 million. The net loss to the state from indirect jobs in FY 2009 was ~$116.9 million.

Coal’s legacy costs, 1: When coal mine operators leave mines incompletely reclaimed, the state bears the cost of polluted drainage, drinking water contamination, and health and safety threats. West Virginia had 4,391 abandoned mine lands in 2009. $464 million has been spent on them. $1.5 billion of work is still necessary. The main funding mechanism to reclaim bond forfeiture sites is insufficient and will expire in 2022. If no action is taken to impose the cost of reclaiming these sites on the coal industry, a further substantial burden will fall to the state.

Coal’s legacy costs, 2: The virtually non-stop caravanning of coal carrying trucks has a devastating impact on the state’s roads and bridges. The cost for dealing with what is done by overweight coal trucks is ~$4.0 billion. If the state spends ~$200 million per year to repair and replace infrastructure and all coal trucks stop now, it would take 20 years to bring the state's roads and bridges back.

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Coal’s legacy costs, 3: West Virginia’s “Old Fund” covers workers’ compensation debt accumulated prior to 2005 for unfunded liabilities from coal industry injuries and deaths. It cost the state ~$115.5 million of coal’s revenues in FY 2009.

When all revenues and expenditures are considered, the coal industry cost West Virginia ~$97.5 million in FY 2009. The numbers are the numbers. Senator Byrd was entirely right. It is time to think about innovation and change.

Recommended policy changes to insure that coal industry costs are paid from revenues from the coal industry and not by the taxpayer:
(1) Maintain the workers’ compensation coal tax revenues and create a Permanent Economic Diversification Fund.
(2) Increase the coal severance tax rate and distribute the monies to coal-producing counties.
(3) Restructure the thin-seam tax credit.
(4) Match funding of reclamation and water treatment to present and future needs.
(5) Increase the per-ton fee on coal haul trucks to match road repair needs.
(6) Increase fines for exceeding permitted haul weights to match the harm it does to roads.

Because mining is expected to produce less revenue and cost more, it is vital to be sure the industry provides not only for its yearly costs but for its legacy costs as well. New policies may be needed.

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Bottom line: The impacts of coal go far beyond traditional accountings of revenues and expenditures, especially when legacy costs from past and future coal industry activity are considered. It is vital for West Virginia to attend to having funds available for such impacts on the local and state economies, on the environment, and on the health of West Virginia residents.

And it is time for West Virginians to start thinking about the immense and barely-tapped potential of their state's New Energy assets.

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QUOTES
- From the report on the costs of WV coal: “Coal plays a significant role in West Virginia’s economy, contributing hundreds of millions of dollars in state and local revenue and providing well-paying jobs to tens of thousands of West Virginians. However, the size of the coal economy, while substantial, is not as considerable as previous accounts suggest. Further, such accounts have only presented coal’s benefits; our estimates provide an initial accounting of both benefits and costs. As estimated in this report, the industry itself—including its direct and indirect employees—actually costs West Virginia state taxpayers more than it provides. Such an accounting is important, for projected declines in production, should they prove accurate, will further diminish coal’s contribution to state revenues, while the negative impacts resulting from coal industry activity will result in ongoing costs to the state and its citizens.”