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A Just Transition for Coal Communities: Use of Financial Mechanisms

By: Charlotte Joannidis, GMU Student Contributor

Of all fossil fuels, coal generates the most carbon dioxide emissions and contributes to air, water, and land pollution, while being a human health risk especially for coal miners and communities living near coal power plants (EIA, 2021, Raimi et al., 2021).

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By: Charlotte Joannidis, GMU Student Contributor

Introduction

Of all fossil fuels, coal generates the most carbon dioxide emissions and contributes to air, water, and land pollution, while being a human health risk especially for coal miners and communities living near coal power plants (EIA, 2021, Raimi et al., 2021). So, transitioning away from coal is key to combatting climate change. However, it is likely that coal power plants will stay in the energy mix worldwide for the foreseeable future. Globally, coal is the leading source of electricity generation, with China and India being the two main countries consuming, producing, and importing coal, as these countries together use about two-thirds of the global coal. In 2021, global electricity generation from coal increased by 9% due to low-carbon energy sources being unable to meet increasing [1] electricity demand (IEA, 2021). The International Energy Agency predicts that the global coal consumption is not on track to meet global net zero emissions by 2050, as coal consumption is increasing for power generation and industrial usage and coal demand is expected to increase into 2024. China and India prepare to increase energy security by investing in domestic coal mining and countries like Indonesia and Russia are investing in increased exporting of coal to improve their economies (IEA, 2021). Specific to the United States, although coal production has been declining due to competitive prices of other energy sources, increased regulation, and decreased demand for electricity generation, coal production increased in 2021 as exports to other countries increased. This increase is expected to continue into 2022, but then will likely continue its decline (IEA, 2021).

Analysis

Even though the domestic demand for coal in the United States is decreasing, the global demand for coal is not. This makes it tempting for the United States to continue to produce coal for exports to other countries, despite the human health, environment, and climate tradeoffs, as well as the economic drawbacks, especially in the electric generation sector. In order for the United States to fully transition away from existing coal power plants, this must be considered, and financial mechanisms are essential to making the transition realistic and feasible.

A refinancing mechanism called securitization has been recommended for use in the United States by organizations such as the Rocky Mountain Institute, the Carbon Tracker Initiative, and the Sierra Club in order to speed up the transition away from coal (Bodnar et al., 2020). This economic tool is also referred to as “securitized bonds” or “ratepayer backed bonds”. Securitization works through allowing utilities to “issue securitization bonds backed by surcharges on customer bills, which 1) refinance electricity customers’ obligation to pay the utility a full return on its (uneconomic) coal assets… 2) provide transition assistance for communities affected by the coal transition; and 3) enable capital recovery for the utility, which it can reinvest in clean energy” (Chen & Matsuo, 2021). Ratepayer backed bonds were used in the 1990s when states restructured their utility markets but have not been used much since then. The goal of securitization is to address utility-owned stranded assets that are uneconomic without hurting the consumers (Lehr & O’Boyle, 2020). Since the coal utility’s remaining debt is switched for a ratepayer backed bond, the ratepayer begins to pay off the bond rather than paying for the depreciation expense of the utility. This creates the potential for ratepayers to pay less on their monthly electricity bills, while replacing their electricity source with renewable energy (Fisher, 2018). States have recently been passing securitization legislation, including Colorado, Montana, and New Mexico which allow ratepayer backed bonds to refinance utility investments for uneconomic coal plants so that they can be retired earlier. However, legislation should include consumer protection requirements, how to acquire replacement resources for electricity generation, and funding for impacted communities and workers in order to achieve the intended benefits of ratepayer backed bonds (Lehr & O’Boyle, 2020).

To address the environmental contamination of shutting down coal-fired power plants, the Environmental Protection Agency (EPA) recommends several federal funding sources that can be used. After the initial shutdown of a coal plant, the next steps are decommissioning, remediation, and redevelopment, and each step requires funding. Grants or tax incentives from the EPA Brownfields Program, U.S. Department of Housing and Urban Development Programs, U.S. Department of Agriculture, U.S. Department of the Interior, and Internal Revenue Service can support the redevelopment of coal plants (EPA, 2016). These federal grants and tax incentives address the environmental cleanup process that comes with retiring a coal plant and developing something new in its place. Making it easier for communities to utilize these programs through educating communities about these options and helping communities through the processes to apply for the grants can ensure that the environmental cleanup aspect of transitioning away from coal is addressed. Additionally, the coal workers from the plants being shut down can take part in the clean-up, remediation, and reclamation jobs, filling in the gap to a new career or retirement. Overall, the affected community can benefit from the jobs created to accomplish all steps after the coal plant shutdown.

One main concern with transitioning away from coal is determining how to support coal workers and coal dependent communities. In a study conducted by the Union of Concerned Scientists and the Utility Workers Union of America, the cost of supporting coal workers who will lose their jobs before reaching retirement age is estimated to be between $33 billion (25-year phaseout program) and $83 billion (15-year phaseout program), depending on how many years it takes to phase out coal (Union of Concerned Scientists & UWUA, 2021). Relative to federal spending during the Great Recession and COVID-19 Pandemic, this option is economically feasible and would include the following supports for coal workers: five-year comprehensive wage replacement for dislocated coal workers (including guaranteed health care coverage), education benefits for coal workers and their family members, job placement and training programs, relocation assistance, and access to mental health and counseling services (Union of Concerned Scientists & UWUA, 2021). In order to effectively address communities reliant on coal, additional investments beyond the estimated $33-83 billion will need to be made to support social services reliant on tax revenue, plans for future economic development in the community, environmental contamination cleanup, and public health impacts from coal-related pollution (Union of Concerned Scientists & UWUA, 2021).

Recommendations

The three recommendations (1) introduction of ratepayer backed bonds in state legislation; 2) use of federal funding sources for decommissioning, remediation, and redevelopment of coal-fired plants; and 3) the investment of money to support coal workers as coal is phased out) aim to take utilities and ratepayers, environmental damage, and coal workers and communities into consideration through economic mechanisms. Some principles that can help guide the implementation of these recommendations in practice include: 1) understanding that there is no one-size-fits-all solution; 2) ensuring that impacted communities are involved in the transition; and 3) accepting that policy may need to adapt as different solutions are implemented (Raimi et al., 2021). When transitioning existing coal power plants, each community will be impacted differently. One, a combination, or all of the above recommendations may be beneficial to aid in retiring and transitioning a plant, depending on the circumstances within each community or location. Thus, there may not be one singular solution that will work for the entire United States. This leads into the importance of community involvement, as they will ultimately be the most affected by the coal transition. Community involvement should be a main priority throughout the transition. Lastly, as these solutions are implemented, a solution in practice and in theory are very different, so aspects of each recommendation may need to be adjusted, especially as unforeseeable future challenges may arise. As coal becomes more uneconomic in the United States, due to other energy alternatives becoming cheaper, regulations becoming harsher, and the tradeoffs of climate, environment, and human health impacts becoming more important, the United States must transition away from the energy source that has been relied upon for decades. Financial mechanisms that consider all relevant stakeholders, such as the three recommendations provided here, are essential to making the transition possible.

References

Bodnar, P., Gray, M., Grbusic, T., Herz, S., Lonsdale, A., Mardell, S., Ott, C., Sundaresan, S., & Varadarajan, U. (2020, June). How To Retire Early Making Accelerated Coal Phaseout Feasible and Just. Rocky Mountain Institute. Retrieved from https://rmi.org/wp-content/uploads/2020/06/How-to-retire-early-June-2020.pdf

Chen, P., & Matsuo, T. (2021, November 4). Demystifying Financial Mechanisms for the Global Coal Transition. Rocky Mountain Institute. Retrieved from https://rmi.org/demystifying-financial-mechanisms-for-the-global-coal-transition/

Fisher, J. (2018, November 12). Aligning Ratepayer and Investor Interests in Non-Economic Coal. Sierra Club. Retrieved from https://www.sierraclub.org/articles/2018/11/aligning-ratepayer-and-investor-interests-non-economic-coal

International Energy Agency. (2021, December). Coal 2021 Analysis and forecast to 2024. Retrieved from https://iea.blob.core.windows.net/assets/f1d724d4-a753-4336-9f6e-64679fa23bbf/Coal2021.pdf 

Lehr, R., & O’Boyle, M. (2020, September). Comparing 2019 Securitization Legislation in Colorado, Montana, and New Mexico. Energy Innovation Policy & Technology LLC. Retrieved from https://energyinnovation.org/wp-content/uploads/2020/09/Securitization-Brief_September-2020.pdf

Raimi, D., Barone, A., Carley, S., Foster, D., Grubert, E., Kearney, M., … Reames, T. (2021, April). Policy Options to Enable an Equitable Energy Transition. Resources for the Future. Retrieved from https://media.rff.org/documents/RFF_Report_21-09_Policy_Options_to_Enable_an_Equitable_Energy_Transition.pdf 

U.S. Energy Information Administration. (2021, November 18). Carbon Dioxide Emissions Coefficients. Retrieved from https://www.eia.gov/environment/emissions/co2_vol_mass.php 

U.S. Environmental Protection Agency. (2016). Coal Plant Decommissioning Financing Cleanup and Redevelopment. Retrieved from https://www.epa.gov/sites/default/files/2016-06/documents/4783_financial_incentives_508.pdf

Union of Concerned Scientists & Utility Workers Union of America. (2021, April). Supporting the Nation’s Coal Workers and Communities in a Changing Energy Landscape. Retrieved from https://www.ucsusa.org/sites/default/files/2021-05/Supporting-the-Nation%27s-Coal-Workers-%28report%29.pdf 


[1] This paper is in response to an assignment to discuss the coal transition and was selected as an exemplary paper in the course, Introduction to Energy Law, EVPP 505-202/POGO 750-021.

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