The “War on Coal” isn’t a matter of government regulations. It is about an outdated energy source, and technology is its only hope for survival.
The Supreme Court is hearing arguments this week on the Clean Air Act with a particular focus on coal pollution. For whatever reason, this is a topic that has picked up steam as a divisive issue. But looking at the actual market data, the criticisms of a “War on Coal” seem to ring a bit more hollow these days.
Basically, coal is a withering industry – the result of two large trends in the energy generation space.
Competing Energy Sources: Harder, Better, Faster, Stronger
First, generating energy is significantly cheaper with natural gas than coal. As a recent report from investment bank Lazard noted, the estimated cost of generating a megawatt hour of energy is $61-$87 for gas, but $66-$151 for coal. And this report is from September 2014, when natural gas futures were trading at $3.80. Now, prices have fallen nearly 30% to around $2.70. Thermal coal, by contrast, has fallen from about $57 to $53 in the same period – a drop of about 7%.
Second, the externality element falls strongly in favor of natural gas vs. coal. As the New York Times notes, “In 2012, the [EPA] issued a rule ordering coal-fired power plants, which are far and away the single biggest source of these emissions (mercury and other toxic air pollutants), to adopt technology to reduce them.” Of course, coal companies have sued the government, arguing that the costs of implementing clean technology outweigh the risks. That’s fair – it will indeed cost far more than even the high end of estimated savings.
But that’s not the point – coal has built up a (deserved) reputation as the dirtiest source of energy. After all, how many times do we see pictures of Beijing and Shanghai on particularly bad air pollution days? The externalities are increasingly factored into the social analysis of energy generation. As the Lazard report notes,
Certain Alternative Energy generation technologies are cost-competitive with conventional generation technologies under some scenarios; such observation does not take into account potential social and environmental externalities (e.g., social costs of distributed generation, environmental consequences of certain conventional generation technologies, etc.) or reliability-related considerations (e.g., transmission and back-up generation costs associated with certain Alternative Energy generation technologies)
This means the true cost of coal is even higher than indicated by the report.
None of this is to say that natural gas is a clean source of energy. It isn’t. But the level of the pollution is becoming as much of a consideration as the cost. As the website of Norway’s Statoil notes, “Replacing coal with gas is one of the measures that will yield a substantial and immediate emissions reduction.”
Even the Chinese leaders are seeing the true cost/benefit relationship with coal. The country has been consulting with Denmark, of all countries, to figure out ways to reduce its population levels.
Turn it, leave it, stop, format it… Technologic.
Which brings us to coals second challenge. Really, it is a problem of every non-renewable source. The cost of producing energy from the technology-driven energy sources – wind and solar – has been plummeting, with no bottom in sight.
Which brings us back to coal. There are two choices for the coal industry:
1) Fight regulations, and get left behind for cheaper, cleaner energy sources, or
2) Implement national, if not global, standards, to make the generation process cleaner. This will cost money, but with emissions being increasingly figured into the total cost, the industry really has no choice.
However, just like your classic prisoners’ dilemma, it will require everyone to play by these rules. If everyone agrees to the standards, the industry will remain somewhat viable, and the coal industry will continue its existence in some form or fashion, though likely at a much smaller scale than the current level.
If anybody shirks, then governments, investors, and utilities will shun coal, because it continues to be perceived as disgusting and dirty. It will be perceived as a dirty and relatively expensive option, rather than just relatively expensive. And this is where regulatory measures come in – some sort of bar must be set, or there will just be too many coal producers/users who will choose the short-term profitable path, rather than the long-term, sustainable path.
So again, the “War on Coal” isn’t from onerous regulations. It’s a war coming from gas, solar, and wind. If anything, regulations are going to be the only thing keeping the coal industry alive.