Steam Coal at an Arm's Length: An Evaluation of Proposed Reform Options for US Coal Used in Power Generation

Abstract

The ONRR has proposed to reform federal coal valuation policy for royalty assessment and in this paper we estimate the expected changes associated with different reform options. We find that if royalty revenues are determined using the delivered price of coal instead of prices used in non-arm’s length transactions, royalty revenues from domestic sales to power generators would increase by $141 million per year. The associated price effect is an increase of 23 cents per ton (0.89%) and the effect on the quantity is a decrease of 971 thousand tons per year (-0.17%). In addition to using delivered prices for royalty valuation if transportation costs that exceed 50% of the net delivered price are included in royalty payments, royalty revenues from domestic sales to power generators are expected to increase by $517 million per year. This change would increase the average price of coal by 88 cents per ton (3.36%), decrease the quantity extracted by 3.7 million tons per year (-0.65%), and reduce severance and income tax collections by $13 million per year.

Keywords: Coal, Royalty Revenue, Policy Evaluation

JEL Classification: D4, H2, L7, Q3