Date Published:

Abstract:

Through its minerals leasing program, the U.S. government plays a large role in the extraction of oil, natural gas, and coal. This footprint is the largest for coal: 41 percent of U.S. coal is mined under federal leases, and burning this coal accounts for 13 percent of U.S. energy-related carbon dioxide (CO2) emissions. Currently, producers and consumers of this coal do not bear the full social costs associated with its use. At the same time, the threat of climate change has led the international community, including the United States, to pledge significant reductions in CO2 emissions. Over the past two decades Democratic and Republican administrations have taken steps to reduce U.S. CO2 emissions by reducing use of fossil fuels. Despite growing public attention to the climate consequences of fossil fuel extraction, U.S. climate policy so far has not extended to the government’s role as a major source of fossil fuels. We propose to incorporate climate considerations into federal coal leasing by placing a royalty adder on federal coal that is linked to the climate damages from its combustion. The magnitude of the royalty adder should be chosen to recognize both the substitution of nonfederal for federal coal, and the interaction of the royalty adder with other climate policies. A royalty adder set to 20 percent of the social cost of carbon would reduce total power sector emissions, raise the price of federal coal to align with coal mined on private land, increase coal mining employment in Appalachia and the Midwest, and provide additional government revenues to help coal communities. This proposal strikes a middle path between calling for a stop to all federal fossil fuel leasing on the one hand, and relying entirely on imperfect downstream regulation on the other.

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