Clean Energy Advocates Should Oppose Subsidizing Coal

The Trump Administration’s proposed subsidy to coal and nuclear plants (the so-called NOPR) continues to roil the energy world. Some nuclear advocates, including the Nuclear Energy Institute and our former colleague (and current California gubernatorial candidate) Michael Shellenberger, are backing the proposed rule.

I previously argued in this space that the rule is likely to result in more coal burning, at a time when coal is being displaced by cleaner and cheaper alternatives like gas and renewables. Now we have the first quantitative forecast of what the rule would do to power markets, and the results are sobering.

The study, by Daniel Shawhan and Paul Picciano at Resources for the Future, finds that over the next 25 years, the rule would cause a net cost of $263 billion and 27,000 additional premature deaths from increased carbon emissions and air pollution due to increased coal burning. The rule would result in an additional 30-110 TWh in coal generation each year. In 2016, coal-fired generation totaled 1,239 TWh, so this would amount to a yearly 2-8% boost in coal burning from 2017 to 2045.

In contrast, Shellenberger recently argued in USA Today that “coal consumption might not increase at all” because of the rule. The article links this claim to a Brattle Group report that discusses the vagueness of the NOPR’s text, which “ensures that each eligible [coal and nuclear] resource ... recovers its fully allocated costs and a fair return on equity.” The Brattle Group suggests that the rule could be implemented to only cover fixed costs. Under this scenario, the rule could just be a subsidy for coal plants to remain open, and not necessarily directly subsidize generation. But it’s hard to see how “fully allocated costs” could only refer to fixed costs. If taken at its plain meaning, as the authors of the RFF report do, the NOPR subsidy provides a profit guarantee to coal generation above both fixed and variable costs.

That seems likely to be the way that the rule will be implemented. The coal industry lobbied hard for the proposed rule and has supported it in public comments. The interest of coal companies is not simply to keep coal plants standing by—their interest is to burn more coal. Lacking any evidence that the Administration, FERC, or the coal industry intends to implement the rule more narrowly, it is hard to conclude that the intent and likely outcome of the rule will not be a direct subsidy for coal generation.

The consequences for public health, the environment, and consumers are significant. The NOPR threatens to roll back the clock on some of the country’s best-known environmental and public health success stories. The increased emissions of sulphur and nitrogen oxides from coal generation, the famous SOx and NOx pollutants that have been sharply declining in the US since the 1980s, account for most of the projected 27,000 premature deaths from the rule. Additionally, any sustained artificial support for coal generation would make meeting national and global climate targets virtually impossible. It’s hard to imagine any economic or environmental justification for costs at this scale.

Consider even the “non-environmental” impacts for a moment. Since the federal government would be forced to compensate coal and nuclear plants above their “market” value, the rule would impose a realized cost on end-users of $70 billion, according to the RFF study. Meanwhile, generators would make a $28 billion profit (really a rent) off the policy, resulting in a wealth transfer from ratepayers to plant operators in the tens of billions of dollars.

Such a significant market intervention would usually be justified by the presence of a significant externality. There is evidence that such an externality exists around nuclear generation: the study finds that supporting nuclear alone would lead to a net welfare gain of $32 billion. But, as the NOPR is written, the benefits of saving 20 GW of nuclear would be entirely overwhelmed by the costs of propping up 25 GW of coal.

Unfortunately, though the vast majority of analysts, activists, and energy industry interests oppose the NOPR, FERC has refused to extend the commenting period, and seems set to fast-track its adoption this month. Advocates for nuclear energy would be wise to push back. As the RFF study shows, a version of this rule that supported existing nuclear plants but not coal plants would yield net economic and environmental benefits. That is the only version of this policy that nuclear and other clean energy advocates should support.

I argued in October that the rule would be a pyrrhic victory for American nuclear power. Although it might stave off the retirements of some struggling nuclear plants, it ties the future of our largest source of clean energy to costly and dirty coal, through an inefficient and poorly designed subsidy. To paraphrase Plutarch, another such victory and nuclear will surely be defeated.