Regulatory Challenges

The future competitiveness of Kentucky coal is inextricably tied to national regulatory policy. The Clean Air Act Amendments of 1990, for example, made it more expensive to use high-sulfur coal by regulating sulfur dioxide emissions. This had a significant impact on the competitiveness of Kentucky coal—particularly western Kentucky, where coal has a higher sulfur content. Some electric utilities responded to the new regulations by incorporating desulfurization technologies (such as scrubbers) to reduce emissions while still burning high-sulfur coal. In recent years, the adoption of these technologies has allowed high-sulfur coal to continue to compete. However, according to a representative from Duke Energy, the renewed interest in high-sulfur coal is likely to have a negative impact on Central Appalachian coal, which is lower in sulfur but more expensive to mine.²² How this renewed interest in high-sulfur coal will impact the state of Kentucky as a whole remains to be seen.

While some utilities have paid for improvements that allow them to burn high-sulfur coal, others have found it more economical to purchase low-sulfur coal from the western United States. The Clean Air Act also brought new requirements for Kentucky and other coal-producing states to limit emissions of nitrogen oxide (NOx). At present, older power plants are exempt from these regulations. As of 2009, only one-third of U. S. coal plants have scrubbers targeting sulfur dioxide, and even fewer have nitrogen oxide scrubbers.²³ However, new restrictions on power plant emissions are likely in coming years. NOx regulations are most likely to impact Kentucky coal by encouraging utilities to switch from coal to other, less polluting forms of fuel such as natural gas.²⁴

Another important regulatory arena is mine safety. Recent mining disasters in the United States underscore the importance of mine safety and heighten pressure for more robust safety regulations for underground operations. The Mine Improvement and New Emergency Response Act of 2006 and subsequent proposed legislation will impact underground mining operations across the country. Larger operations will likely be able to absorb the costs of these new regulations, but already struggling smaller operations may not. The change will have a particularly heavy impact in Central Appalachia, where mines tend to be smaller and more expensive to operate and maintain.²⁵

Safety regulations for underground mines and other cost concerns have led Central Appalachian producers to increase surface mining relative to underground mining in order to cut costs and boost efficiency. Mountaintop removal mining—a common surface mining technique in Central Appalachia—and its considerable environmental impacts are the subjects of considerable debate in Appalachian Kentucky and throughout Central Appalachia. In 2007, a number of mountaintop removal permits were blocked in Central Appalachia due to violations of the Clean Water Act, and many more lawsuits are pending in an attempt to preserve mountain ecosystems and protect headwater streams. As noted in the Wall Street Journal, “pending litigation filed by environmental groups … limited surface mining in the Appalachian region… [leaving] more market share for coal miners using other methods in other regions that don't have the environmental-permit problems of… Central Appalachian producers.”²⁶ A 2007 report from the Energy Information Administration concurred that concerns over water quality will further impact the Central Appalachian mining industry in the foreseeable future.²⁷ In February 2009, the ruling requiring additional environmental reviews of mountaintop removal was overturned.²⁸ While challenges to such rulings continue, it is expected that environmental regulation will increase under the Obama administration.

The most significant regulatory challenge for the industry is the impending regulation of greenhouse gas emissions. At current production levels, coal is responsible for 30 percent of climate change pollution in the United States. As demand for coal grows, this number is expected to rise.²⁹ A recent report by the National Academies of Science notes that regulation of greenhouse gas emissions is one of the most pressing challenges facing the coal industry over the next 25 years.³⁰ A 2007 Supreme Court ruling classifying carbon dioxide as a pollutant under the federal Clean Air Act underscores the immediacy of the issue.³¹ Growing concerns about climate change support a host of proposed regulatory policies calling for drastic reductions in carbon dioxide emissions, creating a tentative mood within the carbon-intensive coal industry. In 2007 alone, more than 50 proposed coal-fired power plants were cancelled or delayed due to uncertainties about cost and regulatory climate, at the same time that operations in several locations halted due to blocked mining permits.³²

In February 2009, the Obama administration announced that the Environmental Protection Agency (EPA) would move toward carbon dioxide regulations based on the 2007 Supreme Court ruling.³³ As environmental concerns mount, such regulations and court challenges are expected to intensify. Faced with increasing regulations, many utilities will likely explore greater energy efficiency, renewable energy, natural gas and other power sources. While demand for coal is expected to continue in the short term, its competitiveness relative to other energy sources is expected to decline in the decades ahead.

The coal industry has responded to mounting climate change concerns by embracing potential new technological solutions to the carbon problem. Existing and proposed emissions regulations have generated increased interest in new technologies, such as facilities with Carbon Capture and Storage (CCS) capabilities. A 2007 Massachusetts Institute of Technology report, The Future of Coal, argues that CCS technologies will be vital to the future of the industry in a carbon-constrained world. The report argues that rapid deployment of these new technologies will be necessary in order to meet demand while addressing carbon caps, and that large-scale demonstrations of cutting-edge technologies are a necessary first step toward this end.³⁴ A response from the Natural Resource Defense Council suggests that CCS technologies must be mandated for all new coal-fired power plants in order to avoid escalating carbon emissions in the face of rising demand.³⁵ A November 2008 EPA ruling finds that, at minimum, coal-fired power plants will have to address carbon dioxide emissions or risk losing their permits.³⁶

The United States Department of Energy’s FutureGen is the most publicized CCS initiative. Originally envisioned as a single large “zero emissions” coal plant in Mattoon, Illinois, the projected costs of the plant skyrocketed until it was eventually cancelled. The FutureGen initiative was restructured in 2008 to focus on integrating advanced CCS technologies into multiple commercial-scale demonstration plants across the country. The restructuring of FutureGen is indicative of a larger problem in the industry: the relative costs and benefits of new coal technologies remain unknown. In the past two years, numerous CCS and other clean coal projects have been scrapped due to escalating costs.³⁷ While such technologies are said to be vital to the future of the coal industry in an increasingly carbon-constrained world, they are riddled with risks many companies and regulatory commissions are simply not willing to take absent a federal mandate.

This tentative mood is apparent in Kentucky and across the nation. A 2007 report from the Kentucky Department of Energy Development and Independence cites the necessity of these technologies for reducing carbon emissions while simultaneously pointing out the costs and risks associated with incorporating them into the state’s aging and outdated plants. The Department states: “The impact on existing units would be higher due to the nature of adding equipment to units not designed from the start for such technologies….At this time, the costs of retrofitting existing sources with carbon capture technologies are highly speculative.” The report goes on to estimate a staggering increase in electricity costs as a result of the adoption of CCS technologies: “The economic impact of a carbon-controlled future on the state of Kentucky could be significant. Estimates are that the cost of adding carbon capture and sequestration capability at existing coal-fired facilities will increase electricity costs between 50% and 300%.”³⁸ The report concludes that while Kentucky coal may eventually benefit from CCS and related technologies, the industry will require much greater public subsidies to make this a viable option.³⁹

22. Zuckerman, Gregory. 2006. “High-Sulfur Coal Has Investors Glowing.” Wall Street Journal (Eastern edition), April 24, p. C1.

23. Johnson, Toni. 2009. “Debating a ‘Clean Coal’ Future.” Council on Foreign Relations. Retrieved March 20, 2009 (http://www.cfr.org/publication/18786/debating_a_clean_coal_future.html).

24. Kentucky Legislative Research Commission. 2004. The Competitiveness of Kentucky’s Coal Industry (Research Report No. 318). Frankfort, KY: pp. 13-23.

25. Dalton, Matthew. 2007. Wall Street Journal (Eastern edition), November 12, p. R.8.

26. Dalton, Matthew. 2007. Wall Street Journal (Eastern edition), November 12, p. R.8.

27. Energy Information Administration. 2007. U.S. Coal Supply and Demand: 2007 Review. Retrieved March 20, 2009 (http://www.eia.doe.gov/cneaf/coal/page/special/feature07.pdf).

28. Associated Press. 2009. “Court Rejects Mining Ruling Mountaintop Removal to Require No Added Impact Study.” Washington Post, February 14, A8. Retrieved March 20, 2009 (http://www.washingtonpost.com/wp-dyn/content/article/2009/02/13/AR2009021301827.html).

29. Sierra Club. 2008. “Ruling: Coal Plants Must Limit C02.” Retrieved March 20, 2009 (http://action.sierraclub.org/site/MessageViewer?em_id=78902.0).

30. National Research Council. 2007. Committee on Coal Research, Technology, and Resource Assessments  to Inform Energy Policy. Coal: Research and Development to Support National Energy Policy. Washington, DC: The National Academies Press, p.1. Retrieved March 20, 2009 (http://books.nap.edu/openbook.php?record_id=11977&page=1).

31. State of Mass. v. EPA 549 US 497 (2007).

32. Schlissel, David, et al. 2008. Don’t Get Burned The Risks Of Investing In New Coal-Fired Generating Facilities. Cambridge, MA: Synapse Energy Economics, Inc, p. 13.

33. Talley, Ian. 2009. “EPA Set to Move Toward Carbon-Dioxide Regulation.” Wall Street Journal, February 23. Retrieved March 20, 2009 (http://online.wsj.com/article/SB123531391527642021.html).

34. Deutch, John and Ernest J. Moniz. 2007. The Future of Coal: Options for a Carbon-Constrained World. Cambridge, MA: MIT Press.

35. Hawkins, David and George Peridas. 2007. No Time Like the Present: NRDC’s Response to MIT’s ‘Future of Coal’ Report. New York, NY: Natural Resources Defense Council, Inc.

36. Sierra Club. 2008. “Ruling: Coal Plants Must Limit C02.” Retrieved March 20, 2009 (http://action.sierraclub.org/site/MessageViewer?em_id=78902.0).

37. Sioshansi, Fereidoon P. 2008. “Regulators Caught In Cross Fire.” Morgan Energy, Energy Informer, August 18. Retrieved March 20, 2009 (http://www.morganenergy.com/?page_id=152).

38. Kentucky Department for Energy Development and Independence. 2008. Carbon Management Report. Retrieved March 20, 2009 (http://www.energy.ky.gov/NR/rdonlyres/DCA3F2AF-F208-4EB4-9C1E-890BE19CEE12/0/CarbonManagementReport.pdf).

39. Kentucky Department for Energy Development and Independence. 2008. Carbon Management Report. Retrieved March 20, 2009 (http://www.energy.ky.gov/NR/rdonlyres/DCA3F2AF-F208-4EB4-9C1E-890BE19CEE12/0/CarbonManagementReport.pdf).