President Obama's election victory was rather unpopular with investors in coal mining stocks yesterday. Shares of Alpha Natural Resources (ANR), Arch Coal (ACI), Peabody Energy (BTU), and Walter Energy (WLT) all fell by roughly 10%, while James River Coal (JRCC) shares shed 30% of their value by the end of the day. While the broader indices declined by 2% over concerns that a return to the political status quo will cause Congress to send the country over the "fiscal cliff" (because it's not like the polls had been predicting this result for the last few weeks, right?), market watchers were quick to attribute the fall in coal mining shares to the president's victory at the polls. This analysis follows the popular narrative that the Obama administration has declared "war on coal," with battle being waged via debilitating EPA regulations on coal-fired power plants.
ANR data by YCharts
The sharp fall in shares of coal mining companies is the result of the belief that this assault will only intensify over the next four years. As commenter on my previous article on the election result put it, "the coal industry is out of business in this country"; "most, if not ALL power plants have to switch to Nat Gas just to meet the new [EPA] regulations"; and "the PRESIDENT promised to BANKRUPT anyone who built a coal plant." In other words, investors believe that the Obama administration wants to end the domestic combustion of coal in pursuit of environmental goals, and will use EPA regulations to drive the U.S. coal industry out of business.
What are these industry-killing regulations that investors are so worried about? There are three in particular that have been the subject of much discussion over the last year.
Mercury and Air Toxics Standards for Power Plants (Utility MATS): MATS will restrict the amount of mercury and non-mercury toxics that coal- and oil-fired electric utility steam generating units with a capacity greater than 25 MW can emit in a single year. The EPA estimates that 600 power plants will be affected by the regulation at an annual cost of $9.6 billion; affected plants will have up to four years to demonstrate compliance. It also calculates the benefits of the regulation at $37-$90 billion annually although, as US News & World Report points out, the latter figure rests on some rather doubtful assumptions. In July the EPA announced that it was reconsidering the regulation and delaying its implementation for at least three months, although some have suggested that this decision was simply political maneuvering to postpone regulatory implementation until after the election.
Carbon Pollution Standard for New Power Plants (CPS): The CPS will restrict the greenhouse gas (GHG) emissions of new fossil fuel-fired electric utility generating units with a capacity greater than 25 MW. Affected power plants will be required to limit the carbon intensity of electricity produced to below 1000 lbs CO2/MWh. Coal-fired units have a carbon intensity of roughly 1700 lbs CO2/MWh while natural gas-fired units have an intensity of 800 lbs CO2/MWh, so this proposed regulation is widely viewed as an effort to force new power plants to employ natural gas rather than coal as feedstock. It has easily been one of most contentious pieces of proposed EPA regulation in recent years, likely because it arose from the fallout of the failed American Clean Energy and Security Act - President Obama's signature cap-and-trade plan that died in the Senate after Scott Brown was elected to the Senate seat previously held by the late Ted Kennedy, depriving Democrats of their supermajority there.
The CPS is currently in the public hearing phase, with a final rule expected within the next 12 months.
Cross-State Air Pollution Rule (CSAPR): The CSAPR requires 27 eastern states to significantly reduce emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) that cross state lines. While coal isn't explicitly singled out as a feedstock, its high contribution to the covered emissions causes coal-fired power plants to be affected. The impact of this regulation is relatively minimal compared to the other two regulations, with the EPA calculating that it will incur annual costs of $0.8-$1.6 billion.
The future of the CSAPR is highly uncertain at present, as the U.S. Court of Appeals for the D.C. Circuit ruled in August that the regulation exceeds the EPA's mandate to regulate emissions and must be revised.
Of the three regulations described above, one has been rejected by a federal circuit court, one is currently being reconsidered, and one has yet to be finalized. It is therefore premature to draw any significant conclusions regarding their impacts on the U.S. coal industry, as at least one (CSAPR) and possibly all three regulations will be relaxed before being implemented. Furthermore, the regulation with the broadest impact, the CPS, will only apply to new electric utility generating units. While existing units will need to be replaced at some point in the future due to age, these units can last decades (our analyses generally assume a 20 year life expectancy, and industry partners tell us that 30 years is more realistic). The CPS in particular, then, cannot be expected to put the coal industry out of business anytime soon.
We still have checks and balances
There's one final point that people forget when they forecast doom for the coal industry over the next four years: President Obama cannot spend an entire term ruling by decree. The Republicans hold a 41-vote majority in the House of Representatives, and the Democrats are at least five votes shy of a supermajority in the Senate. While the EPA operates within the executive branch and can theoretically act without the permission of Congress, in reality proposed EPA regulation is simply a presidential bargaining chip in negotiations with Congress. The Republicans have enough votes to block any and all legislation proposed by President Obama and his Democratic allies in Congress. If the Republicans want to see an EPA regulation weakened and are willing to engage in some horse-trading, then I fully expect an exchange to happen (for example, as part of a grand bargain to avert the coming "fiscal cliff").
Presidents tend to focus on their legacies during their second term, and if the only way President Obama can pass a signature piece of legislation is by gutting the above EPA regulations, then the regulation will be gutted. After all, the only reason we have the CPS in the first place is because the Republicans refused to play ball on cap-and-trade back in 2009.
Shares in coal mining companies have fallen sharply on the news of President Obama's election victory, largely due to concerns that the EPA now has free reign to impose crushing regulations on the thermal coal industry. The EPA is currently considering three major regulations that will significantly affect the coal industry. The future of each is uncertain at present, however, due to federal court rulings, internal revisions, and limiting regulatory language.
Furthermore, the 2012 election is not the 2008 election. The GOP, which is strongly opposed to environmental regulations on industry (particularly during a time of high unemployment), holds a strong majority in the House and enough seats in the Senate to deprive the Democrats of the supermajority necessary to pass most legislation. Between the two, the Republicans have the ability (and the demonstrated resolve) to prevent President Obama from passing any legislation for at least the next two, and possibly four, years. Even if the EPA regulations on the coal industry are strictly formulated and enforced, President Obama will likely use them as a bargaining chip if the Republicans are willing to negotiate on future legislation.
Disclosure: I am long BTU. I am long BTU calls.