U.S. and World Coal Production, Federal Taxes, and Incentives Marc Humphries, Coordinator Specialist in Energy Policy Molly F. Sherlock Specialist in Public Finance March 14, 2013 Congressional Research Service 7-5700 www.crs.gov R43011 CRS Report for Congress Prepared for Members and Committees of Congress U.S. and World Coal Production, Federal Taxes, and Incentives Summary Even though U.S. coal production remained strong over the past decade, reaching record levels of production, coal is losing its share of overall U.S. energy production primarily to natural gas. One of the big questions for the industry is how to penetrate the overseas market, particularly in steam coal, to compensate for declining domestic demand. As U.S. energy policy and environmental regulations are constantly debated, there is ongoing congressional interest in the role of coal in meeting U.S. and global energy needs. The question may not be whether the domestic production of coal is here to stay but, rather, how much U.S. coal will be mined, what type, and under what regulatory framework. Energy Information Administration (EIA) statistics show that more than half (55%) of U.S. coal reserves are located in the West, dominated by Montana and Wyoming, which account for 43%. When including the top five producing states (three of which are in the East), 70% of U.S. coal reserves are accounted for. The United States government owns about one third, or 87 billion short tons (BST), of U.S. domestic reserves. Coal production in the United States reached an all-time high of 1,174.8 million short tons in 2008, before declining to slightly under 1,100 million short tons from 2009 to 2011. Coal production on federal lands accounts for about 43% of U.S. production, according to the Bureau of Land Management (BLM). World coal production has increased by nearly 60% since 2002, most of the increase coming from China—up 130%. Overall, U.S. coal production has been very strong over the past decade and if the industry is successful in penetrating the global market, primarily for steam coal, U.S. production may continue to grow faster than consumption. If recent trends continue, the U.S. coal industry will likely become more concentrated and produce more on federal lands. Businesses in the coal industry are subject to federal income taxes, but coal producers benefit from a number of federal tax provisions, commonly referred to as tax expenditures. There are several congressional concerns related to coal production on federal lands. One concern is the potential for under-market-value coal auctions (sales), e.g., lease offers being accepted by the BLM with few competitive bids. In these cases, the federal government may not receive fair market value for the lease sale. Congressional Research Service U.S. and World Coal Production, Federal Taxes, and Incentives Contents Introduction ...................................................................................................................................... 1 Background Primer on Coal ............................................................................................................ 3 Coal Mining Methods ................................................................................................................ 4 Underground Mining ........................................................................................................... 4 Surface Mining .................................................................................................................... 5 The Coal Cycle .......................................................................................................................... 5 U.S. Coal Resources and Reserves .................................................................................................. 5 U.S. Coal Production ....................................................................................................................... 7 Coal-Producing Industry ......................................................................................................... 10 Coal on Federal Lands ................................................................................................................... 11 The Leasing Process for Coal .................................................................................................. 11 Regional Coal Leasing ...................................................................................................... 12 Leasing on Application ...................................................................................................... 12 Lease Terms and Conditions for Coal ..................................................................................... 12 General Statutory Restrictions ........................................................................................... 12 Coal Lease Terms .............................................................................................................. 13 Coal Revenues (Federal and State) ................................................................................... 13 Federal Coal Resources ..................................................................................................... 13 Congressional Concerns .......................................................................................................... 14 Tax Issues ....................................................................................................................................... 15 Federal Tax Payments .............................................................................................................. 15 Federal Tax Incentives ............................................................................................................. 16 Severance Taxes ...................................................................................................................... 18 World Coal ..................................................................................................................................... 18 World Coal Reserves and Resources ....................................................................................... 18 World Coal Production ............................................................................................................ 19 Projected World Coal Production ............................................................................................ 19 EIA and OECD Outlook .................................................................................................... 19 Conclusions .................................................................................................................................... 20 Figures Figure 1. U.S. Coal Deposits ........................................................................................................... 2 Figure 2. PRB Federal Land and Coal Resources by Access Category ......................................... 14 Figure 3. World Coal Production by Percent ................................................................................. 19 Tables Table 1. U.S. Coal Supply and Demand .......................................................................................... 1 Table 2. Coal Classifications ........................................................................................................... 4 Table 3. U.S. Coal Reserves by State, 2011 ..................................................................................... 7 Congressional Research Service U.S. and World Coal Production, Federal Taxes, and Incentives Table 4. U.S. Coal Production 2002-2011 ....................................................................................... 7 Table 5. U.S. Energy Production in Btus ......................................................................................... 8 Table 6. U.S. Coal Production, Selected States, 2011 ...................................................................... 9 Table 7. Leading U.S. Coal Producers ........................................................................................... 10 Table 8. Leading World Coal Producers, 2010 .............................................................................. 11 Table 9. Coal-Related Federal Tax Incentives ............................................................................... 16 Table 10. World Recoverable Coal Reserves by Rank, 2009......................................................... 18 Contacts Author Contact Information........................................................................................................... 21 Acknowledgments ......................................................................................................................... 21 Congressional Research Service U.S. and World Coal Production, Federal Taxes, and Incentives Introduction Even though U.S. coal production remained strong over the past decade, coal is losing its share of overall U.S. energy production, primarily to natural gas. One of the big questions for the industry is how to penetrate the overseas coal market, particularly for steam coal, to compensate for declining domestic demand. In the past few years, coal production was at or near record levels and exports were up, while domestic demand declined. As U.S. energy policy and environmental regulations are constantly debated, there is ongoing congressional interest in the role of coal in meeting U.S. and global energy needs. The question may not be whether the domestic