Coal companies have bigger problems than the Obama administration


(Marcio Jose Sanchez/AP)

The Obama administration proposed new rules on Monday that would limit the amount of carbon dioxide existing power plants can release. Paul Krugman of the New York Times wrote the plan "could have huge implications" for the future of the planet's climate, while Matthew Yglesias of Vox called Monday "the most important day of Obama's second term."

On Wall Street, investors apparently did not share this sense of the occasion's importance. Shares of Peabody Energy, the world's largest coal company, closed two cents per share below their price from Friday. Shares of Cloud Peak Energy, which mines coal in Wyoming's Powder River Basin, were down eight cents. Shares of their competitor CONSOL Energy were up just over 1 percent.

You might expect the stocks of these companies to have sunk on the news of the Obama administration's proposal. But the rules were widely expected, and the changing structure of the energy sector has long been a more serious worry for coal investors. Alpha Natural Resources, for example, saw its stock fall 14 cents on Monday, but the company's shares have already lost about 90 percent of their value since the end of 2010. Meanwhile, the proposal's ultimate effect on coal producers remains unclear.

Utilities will be directly responsible for complying with any new regulations, but many of them can work with regulatory bodies to raise their rates.

A note from J.P. Morgan largely dismisses the proposal, noting that the measures are not as stringent as had been expected, among both industry watchers and environmentalists. The administration made the proposal's goals easier to reach by allowing the industry to count pollution reductions from 2005. Carbon dioxide emissions from power plants have already fallen by 15 percent since that time.

J.P. Morgan also predicted that the proposal would be challenged in court and noted that future policymakers might weaken the rules after they are enacted. If the proposed rules are adopted, they will enter into effect gradually between now and 2030, giving fossil fuel producers plenty of time to mount a political or legal counterattack.

"Obviously, it's a very politically charged issue," said David Gagliano of Barclays. "It's an industry that has a long history of being under the gun, and also surviving."

At the same time, Gagliano noted, the economic logic of much of the country's coal production is breaking down anyway. The change is partly due to other environmental regulations the Obama administration has adopted previously, but it's largely a result of hydraulic fracturing, a set of innovative techniques for drilling natural gas.

The coal industry could be facing a grim future in politically important states such as Pennsylvania, Virginia, West Virginia and Kentucky, which will make this plan to reduce emissions all the more difficult for future administrations to follow. Investors, however, were already expecting that these mines would become less profitable. Appalachian coal mines are increasingly unable to compete with natural gas, or with the surface mines in the Powder River Basin, where coal is more accessible.


Coal shipments have been falling for the past four years. So far, the current year looks similar to last year. (Energy Information Administration)

The greater significance of the proposal could be in the Obama administration's legal authority to regulate carbon dioxide independently of Congress. If other countries are persuaded that U.S. diplomats will be able to keep their commitments without interference from the legislature, then a worldwide agreement on carbon dioxide becomes somewhat more plausible.

 

Max Ehrenfreund is a blogger on the Financial desk and writes for Know More and Wonkblog.
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