Coal mining’s stranded liabilities disaster

LINGO - Leave it in the Ground Initiative

LINGO – Leave it in the Ground InitiativeFollowJul 31 · 5 min read

or How coal company executives destroy the environment, rip off workers, and walk away with millions

by Peter Morgan, Senior Attorney, Sierra Club

Decades ago, when governments drafted regulations for the fossil fuel industry, they based their regulatory approach on the fundamental premise that coal would always be mined and burned for electricity, and oil and gas would always be extracted and consumed. The faulty premise was that the fossil fuel industry would only ever expand, and the profit from new mines and new wells would pay for worker pensions and for reclamation and environmental clean-up of old mines and wells. Now that we’re seeing a global shift away from these dirty fuels towards clean, renewable sources of power, we’re beginning to see the danger of relying on that faulty premise. We can no longer assume that worker pensions and healthcare benefits, or the environmental obligations of old mines and wells, will be satisfied by the companies that disturbed the ground and created the mess: instead they are increasingly becoming stranded liabilities.

The approach to regulating the environmental effects of coal mining in the United States provides a good example of the flawed approach many governments have taken to addressing a range of fossil fuel impacts. The 1977 Surface Mining Control and Reclamation Act (“SMCRA”) responded to the growing problem of coal mine operators walking away from their depleted mines without conducting any reclamation, leaving behind dangerous sites and perpetual sources of toxic water pollution.

To address this problem, Congress created a new regulatory structure. In addition to setting certain minimum environmental standards, SMCRA requires every mine operator to post a reclamation bond adequate to pay for the cost of a third-party to clean up the mine should the permit holder fail to do so.

In practice, these requirements have proven to be weak. The real crisis of the fundamentally flawed reclamation bonding requirements is only now coming to light: even where the amount of the bond required is adequate (and it very often is not), regulators have allowed permittees to use unreliable forms of bonds. Three primary forms of bonds may be used: self-bonds, pool bonds, and surety bonds. All are vulnerable:

  • The “self bond” approach is entirely premised on the false assumption that in a robust coal market the largest mine operators will never be at risk of default. In 2015 and 2016, however, three of the largest mine operators in the United States, who collectively held more than $2 billion in reclamation liabilities, all went bankrupt. The regulators who had allowed these companies to self bond were now at the companies’ mercy, as the companies knew that the regulators would do anything to keep them from abandoning their unbonded mines and passing 100% of the reclamation obligations on to the states. In the wake of those bankruptcies, regulators started moving away from self-bonding. But they allowed more companies to enter into another extremely vulnerable form of bonding: pool bonding.
  • In a pool bonding system, mine operators are not required to provide bonds on a permit-by-permit basis. Instead, all permit holders pay into a common pool. The amount of money required to be held in that pool is determined on the basis of an actuarial analysis. The first problem with this approach is that actuarial analyses are inherently backward looking, as they rely on historic rates of mine abandonment to project how many mines are likely to be abandoned in the future. But that system will always miss new trends, such as a sector-wide drop in the demand for coal. Further, new funds only enter the pool when new permits are issued. So even if regulators recognize a need to increase the amount of money in the pool because more and more mine operators are closing, they have no ability to generate those funds because no new permits are being started.
  • The final form of bonding, surety bonding, has always been thought to be the most secure because the risk is assumed by a third-party: the surety bond issuer. But just as is the case with pool bonds, the amount of exposure deemed acceptable for a surety bond provider is based on backward-looking actuarial analyses. This creates the potential that bond companies can guarantee more bonds than they can actually pay out. Indeed, the West Virginia mine regulator recently filed papers in state court indicating its concern that one of the major bond providers in that state — a company that has issued more than $1 billion dollars in bonds — may not be able to cover even the $115 million in bonds it’s provided to a single company.

The fundamental failure of these regulatory schemes is important because when bonds are inadequate, the reclamation costs either fall directly onto the public by forcing governments to pay for the clean-up, or indirectly by allowing sites to continue releasing harmful pollution and other hazards. Similarly, when the financial assurances for worker pension and healthcare obligations fail, the burden is shifted to government programs.

Who will pay to clean-up these fossil fuel legacy sites and cover worker obligations? Governments are well advised to mitigate and avoid at least some of the worst outcomes: No new mines or wells should be opened without adequate financial backstops. Operators of existing mines and wells must be required to minimize the amount of disturbed land or uncapped wells at active sites prior to final reclamation. Given the clear trajectory of the fossil fuel industry, governments must act immediately to minimize and address these stranded liabilities — by requiring operators to immediately conduct the maximum reclamation possible, and by allowing only the most reliable forms of financial assurance.

About the series:

The Fossil Endgame blog series is organized by the Leave it in the Ground Initiative (LINGO) in collaboration with the Rapid Transition Alliance (RTA) and supported by the Dutch Committee of the International Union for the Conservation of Nature (IUCN NL).

LINGO works on speeding up the energy transition to 100% renewables, both by supporting frontline struggles against fossil fuel projects and by pushing forward game-changing approaches that can end fossils in years, not decades.

RTA provides evidence-based hope for a warming world. A rapid economic transition, including widespread behaviour change to sustainable lifestyles, is necessary to live within planetary ecological boundaries and to limit global warming to below 1.5 degrees. We gather, share and demonstrate evidence of what is already possible to remove excuses for inaction and show ways ahead.


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