As coal goes down the drain, so, too, are inefficient programs to prop it up. News spread this week that the investigative arm of Congress, the Government Accountability Office, is looking into the “clean coal” tax credit, which generates $1 billion in income for producers around the country each year. But it’s unclear if the tax credit actually has any tangible benefit for the environment, and one analysis shows that it might actually hurt our climate by slowing the transition away from coal.
The phrase “clean coal” actually has no definitive set meaning, and has in fact meant different things throughout different decades. In the 1980s, “cleaning” coal, for instance, meant preventing it from causing acid rain. It’s only recently that we’ve begun to think about “clean” coal in terms of carbon emissions, including our big wet (former) president.
This tax credit, however, deals not with carbon emissions from coal, but rather reducing pollutants. Those include, most importantly, nitrogen oxide, sulfur dioxide, and mercury, which can all have serious health implications when released into the air. In the early 2000s, the federal government thought it would be a good idea to incentivize coal plants to use coal that was specially treated to reduce these types of emissions, and set up a tax credit as part of the American Jobs Act of 2004. This credit has inadvertently led to inefficient techniques that still rake in big bucks for businesses.
“The law itself doesn’t say so much about how they need to actually demonstrate” the required emissions reductions, said Brian Prest, an economist at Resources for the Future. “Congress basically left it up to the IRS to figure out.”
The IRS isn’t exactly made up of engineers or scientists; they’re tax people, and they laid out requirements that made the most sense to them. The IRS required that the company refining the coal be a separate entity from the power plant using the coal. (“Tax lawyers like to have receipts,” said Prest.) And the IRS gave companies two options to prove that their coal refining techniques work: perform a lab test or a field test.
“As it turns out, most companies that are doing this opted for the lab test,” said Prest. “That’s not the same as what’s happening at a power plant. You could have something that works in this test case that doesn’t necessarily have the same impact in the field.”
Businesses soon recognized a way to make a buck, and in the years since the tax credit was installed, a whole ecosystem designed around the credit has sprung up. The way this ecosystem works is this: A business that’s speciality is providing clean coal services will set up shop next to a power plant. They’ll then buy coal from that power plant at market price—essentially, paying exactly what the power plant paid for it—and treat the coal. They’ll re-sell the treated coal back to the power plant at a discount, generally around $2 per ton less than what it paid, Prest said. They then pocket the tax credit of around $7 per ton generated from treating the coal.
That $5 per ton of profit can still mean a lot of cash for refining companies. Energy Information Administration figures compiled in 2018 show that around a fifth of all coal burned in the U.S. was subject to the refined coal tax credit. This means that coal refining companies, Reuters calculated, pocketed around $1 billion in tax credit money. IRS data from 2017 shows that just six companies claimed more than $700 million of the tax credits for refined coal that year.
“Our return on investment is staggering,” the head of Arthur J. Gallagher & Co., a financial insurance company that has invested heavily in coal refining facilities, told analysts on a call Reuters reported on in 2018. “Oh, 200%, 300%, 400%, 500%. I mean, just because it costs so little to develop” clean coal facilities. While Arthur J Gallagher may not be a household name, some of the other beneficiaries of the credit—notably, investors in refined coal—may seem more familiar. Reuters reported that Goldman Sachs, JPMorgan Chase, Capital One, and Fidelity Investments all have investments in companies that provide refining technologies.
Unfortunately, there’s mounting evidence that some of these technologies don’t work as well as they should, and, in fact, shouldn’t qualify the producers for the tax credit itself. Reuters found that Duke Energy plants that used refined coal actually pumped out more nitrogen oxide than they did before they started using it. What’s more, one of the chemicals used to treat the coal, calcium bromide, had leaked from the treatment plant at one of the utility’s power stations to a nearby waterway.
And, as Prest pointed out, a lot of those lab-tested techniques don’t seem to be very effective in the field. A separate analysis done by Resources for the Future in 2019 found that power plants using refined coal were only meeting around half of the targeted percentage of emissions reductions required to claim the credit. And, the Resources for the Future analysis found, the incentivized use of this “clean coal” was actually keeping some coal plants open longer than they otherwise world have.; analysts estimated that these delayed retirements actually led to 2% more generation from those plants due to a longer life on the grid. And the longer coal stays on our grid, the more dangerous the climate becomes as coal is one of the most carbon-polluting fuels out there.
“The increase in climate damages from refined coal plants exceeds the nitrogen oxide and sulfur dioxide benefits from those plants, meaning that the tax credit for refined coal plants actually increases net environmental damage from those plants,” the analysis reads.
Fortunately, there may be a natural end in sight for this inefficient credit. The refined coal tax credit is set to expire at the end of this year, and even without the GAO investigation, its future was already looking bleak. Lawmakers have introduced sporadic bills over the past few years to extend the life of the credit, but those bills “never ended up going anywhere,” Prest said. And even with a whole industry existing on the back of the tax credit, Prest predicts that coal’s steep downfall doesn’t offer much incentive to keep fighting for the credit.
“Given the current makeup of Congress and the White House, I doubt that it would survive,” he said. “I have a sense that people in the industry are seeing the writing on the wall.”
Correction 3/18 11:02 AM: This story has been updated to reflect the fact that the GAO investigation was announced in January, but only widely publicized this week. The first version of this story also incorrectly identified nitrogen oxide as nitrous oxide, a different chemical.