How Will Obama's New Climate Change Initiative Affect the Coal Industry?

The EPA's proposed plan to reduce emissions does not go above and beyond where economics were already leading us

Jun 6, 2014 at 11:27AM

Last Monday, the Obama administration and the EPA announced the most comprehensive regulations yet addressing the production of greenhouse gases like carbon dioxide. The proposal itself is 645 pages of legal and environmental jargon, so discussion so far has revolved around sound bites and headlines. The talking points tell us that the proposal will reduce greenhouse gas emissions by 30% by 2030, and that the regulations take aim squarely at fossil fuel use, with coal the biggest target in the crosshairs. But are these proposed rules as fearsome as they look?

So far, coal interests have reacted with outrage. The nation's largest coal producer, Peabody Energy Corporation (NYSE:BTU), issued a statement accusing the policy of hurting the poor, ignoring "energy poverty," and costing each American household thousands of dollars. In the face of such a dramatic escalation of the "war on coal," Peabody Energy's stock price ... edged up since the announcement. That's because the truth is that the industry and investors knew some kind of regulation was coming, and the Obama administration's plan was seen as more accommodating, to the relief of industry insiders.

Inside the plan

First, the plan does not intend to lower all American greenhouse gas emissions, just American greenhouse gas emissions from power plants. Electricity generation from power plants is the nation's largest source of greenhouse gas emissions, but this sector still only accounted for about 32% of total emissions in 2012.Advocating a slight reduction in one third of the nation's greenhouse gas emissions could be considered a start, but it's far from a comprehensive plan.

Second, the commonly touted figure of lowering greenhouse gas emissions "30% by 2030" is somewhat misleading. The program doesn't seek to lower greenhouse gas emissions 30% from today's levels, but from 2005 levels, which were much higher. Nationwide, greenhouse gas emissions from electricity generation have fallen from 2,430 million metric tons of carbon dioxide equivalent in 2005 to just 2,088 in 2012, the last year for which full data is available. That's about a 14% reduction in greenhouse gas emissions from power plants, meaning that we were almost halfway to the EPA's goal before the agency even announced it!

American greenhouse gas emissions from electricity have been falling without government regulation for two big reasons: the economy and natural gas. The period between 2005 and 2012 of course spanned the biggest recession in recent memory, and during recessions people demand less of everything, including electricity. We're climbing out of recession, however, and indeed the EPA estimates that 2013 and 2014 will both see slight increases in greenhouse gas emissions on the back of stronger demand for electricity.

The swing to gas

Longer-term, however, coal-fired power plants are giving way to natural gas plants, thanks to the abundance and low price of natural gas brought on by the hydraulic fracturing boom in North America. Industry itself is looking to natural gas for the future, not coal. In 2005, coal provided about 50% of all electricity generation, but that ratio fell to just 37% by 2012.  This trend should continue without regulation, as the median American coal plant is spoiling for retirement at over 45 years old, according to Climate Progress.

The age of the coal fleet is a boon for climate hawks, because our oldest, least efficient coal plants are also our most egregious emitters. For the past few years, retired coal capacity has been replaced primarily by natural gas, and that's also good for the greens. Burning natural gas emits about half the greenhouse gases emitted by burning coal. With much of the coal fleet headed for retirement over the nest 15 years, and the replacements virtually guaranteed to be less greenhouse gas intensive, economics if nothing else indicates that the U.S. will hit Obama's power plant greenhouse gas emissions targets. Remember, we're already halfway there, without even trying.

So why issue regulations? It certainly couldn't hurt politically: 70% of Americans support curbing greenhouse gas emissions.  Democrats were never counting on the support of the 30% of the population who oppose greenhouse gas regulation. By endorsing regulation explicitly to curb climate change, the Obama administration has energized environmentalists without alienating a moderate constituency.

Countercharges that such regulations will inflame moderates by increasing energy bills should likely fail, as energy prices are complex and influenced far more by mundane things like weather and production than they are by the EPA's multi-decade plan. If the proposal does indeed raise energy prices, it's unlikely that many consumers would even notice. With the new regulatory proposals, it looks to this commenter that the president has chalked up a political win without making a significant difference on climate change.

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Daniel Ferry has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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