Host Daniel Raimi talks with RFF Postdoctoral Fellow Brian Prest about a little-known topic: refined coal. Brian and coauthor Alan Krupnick have published a new RFF working paper that takes a close look at a $1-billion-a-year federal subsidy for refined coal. So, what is refined coal? What's the purpose of the subsidy? And does the subsidy deliver?
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References and recommendations made during the podcast:
- "How Clean is Refined Coal?" by Brian C. Prest and Alan Krupnick
- The Last Lobster: Boom or Bust for Maine's Greatest Fishery by Christopher White
Daniel Raimi: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. This week we talked with RFF postdoctoral fellow Brian Prest about a topic I didn't even know existed until a couple of weeks ago: refined coal. Brian and colleagues are just out with a new RFF working paper that takes a close look at a $1 billion a year federal subsidy for refined coal. So, what is refined coal? What's the purpose of the subsidy? And does the subsidy deliver? All you have to do to find out is stay with us. Okay. Brian Prest, my friend and colleague from Resources for the Future. Thank you so much for joining us today on Resources Radio.
Brian Prest: Hi Daniel. Thank you. I'm happy to be here.
Daniel Raimi: So Brian, we're going to talk about a new working paper that you and Alan Krupnick have just recently published. The paper, so people can find it on the RFF website, is titled "How Clean is Refined Coal: An Empirical Assessment of a Billion Dollar Tax Credit." So we're going to break down that title and talk about what you found. But before we talk about this new thing, something that is new to me at least, refined coal, can you tell us a little bit about how you got interested in energy and environmental topics, and how you started researching this kind of stuff?
Brian Prest: Sure, absolutely. So, I first got into energy environmental economics and policy in my first job out of undergrad, actually. So in undergrad I had taken some classes on obviously public policy and environmental economics, and I already had some interest going in. But my first job out of college was in 2009 at the Congressional Budget Office. And there I was thrown into doing something that was very timely, and kind of a pretty big deal in the world of environmental policy at the time, which was doing a lot of the economic modeling underlying the CBO's analysis of the Waxman Markey Cap-and-Trade Climate Bill.
Daniel Raimi: Right.
Brian Prest: That had passed the House of Representatives in 2009, and did a lot of the modeling around the subsequent legislation that was considered in the Senate as well. And doing so, I really gained appreciation for the complexities of energy economics and what it takes to decarbonize the economy. And that ultimately led me to pursue a PhD in the topic where I went down to Duke to do a PhD in energy environmental economics.
Daniel Raimi: Go Blue Devils.
Brian Prest: Yeah.
Daniel Raimi: So yeah, I'm also a Dukie, as people know. And that's where Brian and I first met. We were both working for and with Richard Newell at the time. And have continued to do work with him going forward. So, that's great, you were really thrown into the fire of the real world after graduation.
Brian Prest: Yes, absolutely. It was very exciting and intimidating at the same time.
Daniel Raimi: Yeah, I'm sure. So, let's get into the topic at hand, which is this idea of refined coal. So just to give people a little bit of background, as most of our listeners will know, total coal production and consumption in the US has been declining substantially over the last decade. Coal production is down by about a third overall, but the production of refined coal has actually been growing pretty substantially in the last few years. So, that's in large part because of this federal government subsidy that, Brian, you estimate to be on the order of $1 billion each year in tax credits to support refined coal. So can you tell us, what is refined coal? And what is the putative objective of the federal subsidy?
Brian Prest: Sure. So you have the subsidy, the federal tax credit is a $7 a ton tax credit. It's actually for the refining process itself of coal that's used in the electric power sector. And so, the refining process is, you take a regular feedstock coals, regular coal, and before it goes into the power plant to be burned, the refiners apply a chemical spray. These can be a number of different chemicals. A common one is calcium bromide. And the idea is that these chemicals are essentially supposed to make the coal burn cleaner on local air pollutants when it's combusted in the power plant. And so these are local air pollutants, not CO2, as related to climate change, but things like nitrogen oxides, SO2, sulfur dioxide, and mercury emissions.
Daniel Raimi: Right.
Brian Prest: And so, it's supposed to reduce the emissions of local air pollutants. In particular, the tax credit requires companies, in order to be eligible for the credit, they have to demonstrate that they're getting certain levels of reductions on these three pollutants. The tax law says you have to show that you're getting 20 percent reductions in your rate of NOX emission rates. That's nitrogen oxides. And also 40 percent reductions in SO2 emission rate, or the mercury emission rate. And so, on the 40 percent you get to choose. But the point is you're supposed to get a 20 percent on NOX and 40 percent on one of the other two, SO2 or mercury.
Daniel Raimi: Right. And so there should be a public health benefits that accrue from the reduction of those emissions.
Brian Prest: Exactly. Yeah. So, SO2 and NOX are known to form a particulate matter in the atmosphere as well as ozone. And those have health impacts of premature mortality. And mercury is associated with a neurological problems, particularly in infant health.
Daniel Raimi: Right. And so there are . . . You talked about sort of feedstock coal and refined coal. Many of our listeners, will know there are different types of coal. So there's bituminous coal, there's sub-bituminous coal, there's anthracite, and then there's lignite. Is there a particular type of coal that this refining process is typically applied to? And are there parts of the country where we tend to see this technology deployed more commonly than others? Or kind of where is this happening, and what kind of coal is it happening to?
Brian Prest: Sure. So first of all, refined coal is essentially exclusively used in the power sector. So in the use of coal for electricity generation. Anthracite is not really used for power generation in the US. But among the other three types that you mentioned, bituminous, sub-bituminous and lignite, all three types can be refined. And in particular, the tax credit does not differentiate between whether you're refining one type of coal or another. And in practice, all three kinds of coal are in fact refined. As for regions, the bulk of coal fired power plants in the US tend to be located in the Midwest. And so, that also happens to be where most of these refined coal plants are located. One thing that does stand out, that was particularly interesting to me, was that there are a number of power plants up in North Dakota that burn lignite. Lignite is a relatively low quality, cheap coal.
Brian Prest: And a number of these plants are refining lignite. And this is interesting because, as I said, the tax credit doesn't differentiate between whether you're burning cheap coal or expensive coal. Either way, you get the $7 tax credit. And so, as share, or as a percentage of the coal costs, the tax credit is much larger for these plants burning low quality, cheap lignite coal. So as an example, lignite, a typical price for lignite coal is about $20 a ton. And so, $7 a ton is a large fraction of that.
Daniel Raimi: Yeah, for sure. And do you have off the top of your head what kind of benchmarks prices we would see for other types of coal, bituminous or sub-bituminous?
Brian Prest: You should think typically in the range of maybe $35 to $60 for the other kinds of coal.
Daniel Raimi: Right.
Brian Prest: So, higher.
Daniel Raimi: Okay. Yeah. So a pretty substantial difference there.
Brian Prest: Mm-hmm (affirmative).
Daniel Raimi: So, let's get into kind of what you did with this paper to try to estimate the effects of the subsidy, and how effective it is at actually reducing some of these emissions. And one of the first things that I learned when reading this paper, and also I've seen you present this work before, is that the way you measure your emissions reductions is really important. So, can you tell us a little bit about how companies measure those emissions reductions, and why that matters?
Brian Prest: Yeah, sure. Absolutely. So the tax rules issued by the IRS essentially give companies two options to demonstrate that they're getting these reductions. One is through field tests at the actual plant where the coal is normally burned. And the other option is through laboratory tests. And as we understand it, most operators tend to prefer the laboratory tests. And so, these are a small one megawatt, so that's a very small boiler, and then they run it under idealized conditions, often with certain kinds of pollution control technology. And they use that to demonstrate that they're getting the reductions. Now, we don't have much information about the results of those lab tests because they tend to be private, not publicly available. But they appear to differ substantially from the conditions at the plant. Typically operators do not use these field tests. So, that's another way that you could demonstrate you're getting the reductions. Operators tend not to choose it, but that's what matters in practice. And so, that's what we're doing here.
Daniel Raimi: Right. So to get your tax credit, you need to demonstrate that you're getting reductions and it's probably easier to demonstrate that you're getting those reductions under these idealized conditions in the lab.
Brian Prest: That's right.
Daniel Raimi: How big is this effect when you look at real world emissions data, which I believe you gather from the EPA, and you compare it with what companies are supposed to be achieving. What are some of the differences that you find?
Brian Prest: Right. We're finding fairly big differences. So as I mentioned, the tax law requires 20 percent reductions on NOX and 40 percent reductions on one of the other two, SO2 or mercury. As for SO2, we're finding essentially zero reductions in practice, on average in the field. As for NOX and mercury, we're finding that the reductions on average in the field tend to be about half as large as required by the tax law. So, for NOX, which requires 20 percent reductions, we're getting something closer to 10 percent. And for mercury, which requires 40 percent reductions, we're getting something closer to 20 percent. And in addition, for mercury, it's particularly interesting because we're only finding reductions attributable to refined coal, when certain kinds of pollution control technologies are installed at the plant. And so, without those pollution control technologies installed, then refined coal essentially has no impact on mercury emission rates.
Daniel Raimi: Right.
Brian Prest: Which is very different presumably from what the lab tests are showing.
Daniel Raimi: Right. And so, just to go a little bit deeper on that question, the pollution control technologies, these are SCR scrubbers or other pollution controls that coal units have been retrofitted with to reduce their air pollutants in other ways. So you're finding for those plants that have these pollution controls, there is an effect of using refined coal. But for plants that do not have the pollution controls, there's essentially no benefit to using the refined coal. Is that right?
Brian Prest: Right. In particular, that's true for mercury.
Daniel Raimi: Right.
Brian Prest: However, eligibility for the tax credit doesn't differentiate between what kinds of pollution controls are installed on site, if they're based on lab tests.
Daniel Raimi: Right. So definitely something to look at in terms of the policy. And so, the results you've just described, the lower than expected emissions reductions, those are averages across the country, if I read the paper correctly. Do you see a lot of variation across different types of plants? So you've already talked about some plants that have pollution controls, and plants that don't. In the paper you also describe how some plants actually see their emissions go up when they switch to refined coal, while other plants might be actually achieving the targets. What's the range of results across the different plants that you see?
Brian Prest: Right, yeah. As you correctly point out, the numbers I just cited are averages. So you might think that maybe some plants aren't performing, but maybe other plants are. And so, maybe there are some good actors out there. We dig down into this and we essentially kind of redo the analysis at the boiler level, which is smaller than a plant. A plant can have several boilers. And we try to find out, are there any boilers for which we can show that they seem to be achieving the emission reductions required by the tax law. And we can't do this for every single boiler in the country due to data limitations, but for the ones we can, we essentially find a kind of a similar result. Some appear to be achieving the reductions on NOX emission rates. A very small number appear to be achieving the 40 percent reductions on mercury or SO2. But we can't find any particular boiler that appears to be jointly achieving the 20 percent reductions on NOX and 40 percent reduction on one of the other two.
Daniel Raimi: Wow, so not a single one that you're able to get data for is actually hitting the specified targets.
Brian Prest: As far as we can estimate, that's right.
Daniel Raimi: Yeah. So one of the really interesting things about the way this policy is designed, the way I understand it, is that the tax credit is actually paid to the refiner of the coal, and not to the operator of the plant that actually burns the coal. And so, the refiner is the one that has to demonstrate these reductions. But the reductions in the real world don't happen at the refinery. Right? They happen at the coal plant. So, can you talk a little bit about whether that distinction matters, and how it matters in, in terms of policy design?
Brian Prest: Sure, absolutely. So, one distinction about the credit is, as you say, it's given to the refiners. The refiners actually typically have to be a distinct legal entity from the plant operators. And so, a lot of these refiners are actually outside investors. Think tax equity investors. And these guys actually build refineries on site at the plant, typically. So it's not actually a separate facility necessarily. But they are a distinct company and legal entity. And these are the ones who are claiming the tax credit, and these are the ones who are essentially certifying, or demonstrating the reductions associated with the refining. But they're not the ones operating the plant. And so, it's possible that the refiners who are testing the refined coal in the lab, but have no actual control of the operations of the plant, it's possible the refiners don't realize that the reductions that appear to be arising in the lab don't seem to be arising in the actual operations of the plant.
Daniel Raimi: Yeah, that makes sense. Okay. So let's talk a little bit about . . . We've already touched on some policy implications of what you found here. Let's talk about a little bit more. The government is spending, you estimate about a billion dollars a year on these tax credits. And according to the estimates that you and Alan Krupnick have come out with, they're not getting what they bargained for, right? The emissions reductions are not being achieved. But that said, there are still some emissions reductions that you find. If you look at the benefits of the emissions reduction, they might still be worth it from a cost benefit perspective. And you do that test in the paper. So, when you do a cost benefit analysis on this imperfect policy, what do you find?
Brian Prest: Yeah, that's absolutely right. Emission reductions have tremendous value in terms of reduced premature mortality, among other things. And so, it's possible that these 20 percent and 40 percent requirements of the law are just overly ambitious. 40 percent is a big reduction in emissions. So we look at and say, well, what are the costs of this refined coal tax credit? And what are the benefits based on the emission reductions that we do estimate? We tally those up, and we estimate the impacts on reduced premature mortality associated with particulate matter in the atmosphere, caused by the accumulation of these pollutants. And then we come to a dollar, monetized value of those emission reductions, and we put it in the ballpark of about a $500 million a year in benefits.
Brian Prest: But then we compare it to, what are the costs of this? The costs, both private costs, and social costs, and taxpayer costs come out to about $7 a ton, which is the value of the tax credit. Or as you say, about a billion dollars a year. And so, that suggests that the costs are far exceeding the benefits. The cost of a billion far exceed the benefits of about 500 million a year.
Daniel Raimi: Right.
Brian Prest: However, if we were getting these very, very large reductions of, say 40 percent in SO2, then the benefits would easily justify the costs. But we don't appear to be achieving those reductions in practice.
Daniel Raimi: Right. It's also probably worth noting that the benefits that you estimate are primarily associated with PM2.5, right? This really small particulate matter, and does not include all of the potential effects that we might think about, including, correct me if I'm wrong, but I don't think the cost-benefit analysis accounts for ozone or mercury emissions, is that right?
Brian Prest: Right. Well so, a couple components there, in particular we think we may be actually overstating benefits for a number of reasons. One is that we haven't accounted for the water quality impacts of refined coal. The chemicals used in refining coal in some cases have been known to escape with the wastewater at power plants, and can form carcinogens in drinking water. So those would be negative environmental impacts. We haven't accounted for those in our analysis. In addition, we think we might be overstating the impacts, the benefits, I should say, of NOX and SO2 emission reductions. This is because of how refined coal interacts with preexisting environmental policies, particularly on the cap and trade policies for NOX and SO2. The idea being that if they're already regulated by a cap, and that cap is binding, any reductions in emissions at one power plant is just going to free up allowances that they can sell to other power plants to increase their emissions.
Daniel Raimi: Right.
Brian Prest: And so to the extent that those caps are binding, our reductions are overstated. And the benefits are probably much smaller, and could actually be negative.
Daniel Raimi: Right. Okay. So, as with all RFF work, there are many, many details that are important. And that we would encourage people to check out on the paper. Let's close up with one last policy question, which is the subsidy that you describe in this paper is up for reauthorization in 2021. Do you think there's interest in the Hill in potentially looking at this tax policy again, and maybe reconsidering some of its elements?
Brian Prest: Yes, absolutely. This issue is actually particularly policy-relevant right now, even though we've been working on this for many months now. Just last month, two bills were introduced in the Senate by, I believe six different senators, to reauthorize this tax credit. And so, there's very clearly ongoing, and upcoming legislative activity on this tax credit. In addition in context of other expiring tax credits that are being considered for overhaul around the same time. In addition, I'll say that the last time this tax credit was altered, I should say the last two times it was altered, were in 2008 as a provision that was put into the Troubled Asset Relief Program during the financial crisis. And then later it was included in the 2010 extension of the Bush tax cuts under the Obama administration. And those were both very must pass pieces of legislation.
Brian Prest: And it's possible many people didn't really notice that they were in there. At the time, there was no real systematic evidence on the use of refined coal in the field. But now there is, and so we're hoping that this could help inform policy making going forward as this tax credit is considered for extension.
Daniel Raimi: Right. Yeah. Two thoughts come to mind. One is that the old saw of a billion here, a billion there. Pretty soon we're starting to talk about real money. And in the context of big pieces of legislation that can absolutely be the case. And then the other point to make, and we say this at the end of every episode, but I just want to reemphasize it here, that at RFF we don't take institutional positions on public policies. We do research and analysis and provide that information and let decision makers make decisions. And so, I just want to make clear that that's what we're doing here. And Brian, this is a fantastic example of something that's really timely, really policy relevant, and really informative. So, kudos to you and Alan for this work.
Brian Prest: Thank you.
Daniel Raimi: So now that the serious part is done, we're going to close it up and talk about what is on the top of your literal or metaphorical reading stack. So, what have you watched, or heard, or read recently that you've enjoyed and that you'd recommend to our listeners? And I'm going to start with two quick things. The first is just an admonition to Brian, that Brian you're not allowed to recommend Our Planet, the documentary from David Attenborough that's on Netflix. Because three of our last, I think six, podcast guests have recommended it. So you're not allowed to do that. You have to do something else.
Brian Prest: Can I recommend Planet Earth or Blue Planet?
Daniel Raimi: No, those are off limits too. And the second thing, just because Brian we're buddies, I'm going to give you a little quiz. Okay?
Brian Prest: Uh oh.
Daniel Raimi: So, Brian and I, we've both and a lot of work on oil and gas, and oil in particular. So Brian, if you had to make an estimate, how much crude oil do you think the US is exporting these days? During 2019 what do you think we're exporting on average?
Brian Prest: These are gross exports, right?
Daniel Raimi: Gross exports. Yeah.
Brian Prest: Oh God. I feel like I should know this much better than I do, but I'm going to guess 4 million barrels a day.
Daniel Raimi: Oh, you went high. That's a little too high, actually. It's a little too aggressive. But the number is still pretty amazing. It's almost 3 million barrels a day.
Brian Prest: Oh, I was so close.
Daniel Raimi: So, in 2016 the US essentially exported zero crude oil. And today we're exporting about 3 million barrels per day. To put that in context, that's more than the UAE. That's more than Kuwait. And it's more than most other OPEC nations. Saudi Arabia, which is the world's biggest exporter of crude oil, in 2017 exported about 7 million barrels per day. So the US has just ... It's just this incredible time in terms of oil production in the US, and it's amazing to watch it. So, now that I've stumped Brian, I'm going to ask you to share what you've been reading, and what's on the top of your stack.
Brian Prest: Okay, well I'm going to move away from oil after getting that question wrong. But I will talk about something that I've read recently that is related to oil, and that I know that you've done work on: the boom bust cycle in oil, as oil prices go up and down. But I read a book in a very different field about lobsters recently, actually. It's called The Last Lobster: Boom or Bust for Maine's Greatest Fishery.
Daniel Raimi: Ah.
Brian Prest: It's by Christopher White, and it was very interesting. The most striking and memorable statistic I learned from this book is that the Maine lobster fishery, well the Northeastern lobster fishery, has on average been moving North by 4.3 miles every year for the past several decades. And that's quite a long way for lobsters to go every year. And this is because of warming climates have led lobsters to move North towards colder water. But the result has been that the Long Island Lobster Fishery, which used to be a huge lobster fishery, is essentially nonexistent these days. And now you're seeing a huge boom in lobster caught up in Maine. And so, it creates these interesting boom bust cycles that move North over time. And it also raised the question of what's going to happen as they continue to move North into Canada.
Brian Prest: How will Maine's economy change? And apparently we've actually been seeing fisherman catch tropical fish more and more commonly off the coast of Rhode Island these days. And so, I thought it was an interesting illustration of the interrelationship between the economy and changing climates in ways that are not obvious to people, or intuitive to people, even to people like me who study this a lot.
Daniel Raimi: Yeah, absolutely. That's fascinating. And it brings to mind that David Foster Wallace short story, and maybe book too, called Consider the Lobster. Which is actually about cooking lobster. It's not about the fishing lobster. But anything with lobster in the title, I think of that story. Anyway, that's a fascinating recommendation Brian, and we'll put a link to it on the show page so people can go check it out. We'll also encourage people to check out Brian and Alan Krupnick's recent paper, which is called “How Clean is Refined Coal?” And once again, thank you so much Brian for joining us on Resources Radio.
Brian Prest: Thanks. I really enjoyed it.
Daniel Raimi: Thank you so much for joining us on Resources Radio. We'd love to hear what you think, so please rate us on iTunes or leave us a review. It helps us spread the word. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent nonprofit research institution in Washington DC. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org. The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Kate Petersen with music by Daniel Raimi. Join us next week for another episode.