Putting a Carbon Charge on Federal Coal: Legal and Economic Issues

Abstract

US policy to limit greenhouse gas emissions is currently driven, in part, by the US Environmental Protection Agency’s proposed Clean Power Plan, which seeks a drop in carbon dioxide (CO2) emissions from fossil-fueled power plants — a “downstream” approach to regulation. Here, we consider an alternative, or possibly complementary, regulatory perspective: What is the legal and economic feasibility of imposing an “upstream” CO2 charge on coal production at its extraction site? Specifically, our focus is on leased coal from federal lands managed by the Bureau of Land Management (BLM). Such a carbon charge is designed, in principle, to embody the cumulative “lifecycle” externalities from coal mining to combustion (or other “downstream” utilization). Our legal analysis concludes that BLM has the statutory and regulatory authority to impose such a charge and that it would be best to add it to the royalty rate. But a large fee that would dramatically reduce revenues could invite judicial concern. The economic case is weaker than the legal case because production on state, private, and tribal lands (60 percent of total production) would not be subject to the charge and so could ramp up in response to the economic disadvantage the charge would cause for coal on federal lands, among other reasons. Best would be a comprehensive set of charges on royalties for all fossil fuels, irrespective of ownership.

Keywords: carbon taxes, coal, climate change, pollution strategies, emissions reductions

JEL Classification: Q30, Q52, Q54