Revenue at Risk in Coal-Reliant Counties

Abstract

This paper examines the implications of a carbon-constrained future on coal-reliant county governments in the United States. We review modeling projections of coal production under reference and climate policy scenarios and argue that some state and local governments face important revenue risks. Complex systems of revenue and intergovernmental transfers, along with insufficiently-detailed budget data, make it difficult to parse out just how exposed jurisdictions are to the coal industry. A look at three illustrative counties shows that coal-related revenue may fund a third or more of their budgets. When the results of regression analysis of 27 coal-reliant counties are extrapolated outside the sample to the demise of the industry, they suggest these counties could lose on average about 20 percent of their revenue. This does not account for the potential downward spiral of other revenues as the collapse of the dominant industry erodes the tax base. Coal-dependent communities have issued a variety of outstanding bonds that will mature in a time frame in which climate policy is likely. Our review of illustrative bonds indicates that municipalities have not appropriately characterized their coal-related risks. Ratings agencies are only now beginning to document the hazardous exposure of some local governments to the coal industry. Climate policies can be combined with investments in coal-dependent communities to support their financial health. A logical source of funding for such investments would be the revenues from a price on carbon dioxide emissions, a necessary element of any cost-effective strategy for addressing the risks of climate change. We discuss how a small fraction of revenue from a federal carbon price in the United States could fund billions of dollars in annual investments in the economic development of coal-dependent communities and direct assistance to coal industry workers.