By Shelley Goldberg
The U.S. coal industry breathed a sigh of relief this week after the Supreme Court blocked President Obama's proposed limits on mercury emissions from power plants under the Clean Air Act.
The president had been enjoying a winning streak at the nation's highest court. Recent decisions upheld his signature healthcare bill and the right of same-sex couples to marry in all 50 states.
His record on the environment, however, just took a significant hit.
This most recent case overturned one in a series of three major environmental regulations that Obama had hoped would establish his "Earth-friendly" legacy.
The first two regulations - limiting pollution from power plants that spreads across state lines and cutting greenhouse gas emissions - have thus far survived judicial scrutiny.
But the third failed by a bare majority.
While environmentalists are lamenting this loss, the coal industry is cheering. It's a win for that sector - and for anyone looking to invest in coal.
Watch the Mercury Rise and Fall
Last Monday, the Supreme Court ruled in a 5-4 decision (with the five conservative justices in the majority) to block one of the Obama administration's most ambitious environmental initiatives - a regulation that would have limited the amount of mercury and other toxic pollutants emitted mostly from coal-fired and -powered plants.
The rule, which aimed to protect the public from the significant amount of toxic emissions that come from coal- and oil-fired electric utilities, was issued over three years ago and went into effect in April.
But 21 states, along with industry groups like the National Mining Association and a coal-fired power plant in Ghent, Kentucky, appealed the ruling after an appeals court upheld the regulation in June of last year.
The linchpin for proving this case impassable was that the court found that the U.S. Environmental Protection Agency (EPA) violated the Clean Air Act by failing to undertake a cost-benefit analysis.
The main argument, written on behalf of the court by Justice Antonin Scalia, was that the Clean Air Act required the regulation to be deemed "appropriate and necessary." The agency didn't consider the cost of compliance involved in regulating power plants for mercury and other pollutants, while it indicated that it was not required to do so at the time.
The challengers of the ruling argued that the EPA's refusal to consider the cost of compliance, which was estimated to be $9.6 billion per year, would result in businesses and households paying larger electricity bills, and would only achieve about $6 million in benefits.
The agency argued that the benefits of reducing mercury would substantially outweigh the costs.
According to the EPA, such benefits include the prevention of approximately 11,000 premature deaths per year, and a reduction in the number of developmental delays and other abnormalities in children that are linked to mercury.
It estimated the regulation would result in a savings of $90 billion annually.
The rule applies to approximately 1,400 electricity-generating units at 600 power plants around the country. Since its inception, many plants are moving toward compliance, according to a statement made by the EPA, or have already met the standard.
A Smudge on the Clean Air Act
According to Reuters, lawyers following the case indicate that the legal rationale is unlikely to have broader implications for other environmental regulations, such as the Clean Power Plan, which cuts carbon emissions from existing plants.
The decision doesn't strike down the rule, but rather means that the EPA needs to sharpen its pencils and get to a viable number with respect to the cost of compliance.
Later this summer, the agency is expected to release a set of landmark climate change rules and restrictions that have faced legal challenges from the industry.
This decision leaves the legal status of the regulation in limbo. The rule stays in effect for the near term. But the case will return to an appeals court, at which time the court will decide whether or not the case should be thrown out.
It's a known fact that the EPA and the Obama administration are focused on policy and regulation of coal. It's also clear that U.S. energy policies are guiding the country away from reliance on fossil fuels and toward a sustainable energy system with greater energy independence.
Yet, it seems coal will be with us and the rest of the world for a while longer. Particularly seeing as the U.S. coal demonstrated reserves, currently estimated at 480 billion tons, are larger than the remaining natural gas and crude resources, according to the Energy Information Administration.
Because of that, I think it's safe to look for some undervalued coal investments, most of which have taken a severe beating.
Winners and Losers
From an investment standpoint, the near-term winners are companies like Peabody Energy Corp. (NYSE:BTU), the biggest U.S. coal producer, and Arch Coal (NYSE:ACI), both of which have been increasingly concerned about power companies turning to natural gas - the more efficient and cheaper fuel - to generate electricity.
While the obvious loser in all of this is the environment, there are also companies that will lose out, including Exelon Corp. (NYSE:EXC), the largest nuclear power plant operator, and large natural gas producers, such as Anadarko Petroleum (NYSE:APC).
For now, keep your eye out for future environmental policy developments. Even if the EPA doesn't immediately get its way on mercury, companies that are good prospects in the medium to long term are those developing innovative clean coal technology - the so-called integrated gasification combined cycle, or IGCC.
While IGCC comes with an expensive price tag, it strips carbon dioxide out of burning coal and concentrates it to be captured and dispatched to underground storage.
Southern Company (NYSE:SO), for example, is testing a technology called TRIG (Transport Integrated Gasification), which is designed to take lignite coal and transform it into a clean synthetic gas from which carbon dioxide is captured.
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