Bankrupt Patriot Coal is selling coal mines to an environmental group, the Virginia Conservation Legacy Fund. Only this group plans to keep running one of the two mines it's buying, creating "clean" coal with carbon credits. Is this a new model that could save the U.S. coal industry from extinction?

Coal is dirty
One of coal's biggest problems is that it's among the dirtiest carbon fuels around. A lot of money has been spent trying to clean it up, to much success, but it's still one of the dirtiest options for generating electricity. The big thing right now is the carbon dioxide that coal burning releases and the impact that has on global warming.

A Peabody mine at work. Source: Peabody Energy.

To be fair, coal is losing out to other fuels for more than just environmental issues. For example, natural gas is cheap right now so it has increasingly been displacing coal in the power picture. And the cost of "clean" options like solar and wind has been coming down, making them more and more competitive, too. However, coal still makes a significant portion of the power we consume and provides important fuel source diversification for power companies. It's expected to remain an important part of the power space for years to come.

So Patriot Coal's deal with the Virginia conservation group is interesting because the plan is to keep mining for coal from one of the two mines that are part of the deal while at the same time creating carbon credits through land reclamation efforts. By bundling the two together, the Virginia Conservation Legacy Fund is hoping to create a "compliant" carbon fuel alternative for utilities.

Not exactly clean
The idea is that the reclamation efforts will sop up the carbon that would be created by burning the coal being sold. You could easily argue that this won't make coal a clean fuel, but it is a unique approach to the dirty coal problem that could keep coal mines open, power plants running, and coal miners on the job. And it's something that any number of coal miners could emulate.

For example, Peabody Energy Corporation (OTC:BTU) is the largest publicly traded pure-play coal miner in the world. It has material operations in the Powder River Basin and Illinois Basin in the United States. It has well over 7 billion tons of proven and probable coal reserves and -- this is the interesting thing here -- approximately 500,000 acres of surface property through ownership and lease agreements.

The mining process includes reclamation efforts at closed mines. So Peabody already knows how to do what the Virginia Conservation Legacy Fund is talking about. But what if it took that knowledge a step further? Instead of just living up to its obligation to return old mines to their pre-mining state, it could start to improve land for the sole purpose of creating carbon credits that it would then be able to pair with its coal. Suddenly Peabody Energy is selling "clean" coal.

Peabody employees working on a restoration project. Source: Peabody Energy.

It would be hard to suggest a struggling miner such as Arch Coal (NYSE: ACI), which is dealing with heavy debts at a time when earnings are in the red, could go down this path right now. Indeed, Arch is more concerned with surviving than shifting its business model to be environmentally friendly. However, a miner such as Alliance Resource Partners LP (NASDAQ:ARLP), which is actually making money despite the coal downturn, could easily embrace the model if it proves workable.

A scaled-down test
The Virginia Conservation Legacy Fund's plan isn't going to turn big coal's fortunes around overnight. It's more of a test to see if this idea can really play out as planned. But if it can, there's long-term hope for the coal industry to continue to live on to fight another day, albeit as a smaller player than it has been in the past. Shrinking, however, is already in the cards for the industry as it loses share to low-priced natural gas and other alternative energy sources.

The biggest issue is most likely going to be getting the government to go along with the idea. At this point, there's no way to tell if carbon credits sold along with coal will count toward federally mandated carbon reduction goals -- which themselves aren't set in stone just yet. So planting some trees is only the first step of the process. That said, big coal still has plenty of friends on Capitol Hill, providing at least a possibility that carbon credits and coal will be a happy mixture.

Coal's not dead yet
Coal isn't dead yet and it isn't going to be for many years to come. Although the Virginia Conservation Legacy Fund's idea isn't a slam dunk, it is worth watching this unique take on "cleaning" the fuel up. And for miners like Peabody with lots of land or Alliance with the financial strength to adopt a new tactic, it could be a Hail Mary pass that keeps the doors open for longer than investors are expecting today. Clearly this isn't a reason to run out and buy troubled coal miners, but if you are a contrarian, it's a potential silver lining in a deeply out-of-favor industry.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.