By Daniel Sholler, University of Pennsylvania
In the absence of a mandatory cap-and-trade scheme, the United States has developed hybrid environmental markets based within industries or spanning a sector of the economy. Such markets arise due to the convergence of an industry’s environmental externalities, political regulations, and the financial interests of third parties. Regulation of these industries attempts to be both reactionary and preventative, as legislation is often geared toward both conservation of natural resources and protecting future economic conditions. The third parties are often major banks with a significant portion of commerce dedicated to commodities investments. At the intersection of these three interests, interdependency develops and forms a market. The conditions are particularly important to the profitability of publicly traded companies.
One such company—the aforementioned Massey Energy Company—has encountered significant difficulties in recent months. After an April 2010 mine collapse disaster, Massey came under fire for dismal safety regulations and controversial extraction practices. In particular, surface mining, more commonly known as mountaintop removal, is a source of contention in the environmental community and is the subject of recent evaluation in the political arena. Mountaintop removal involves using explosives to reach coal reserves beneath the surface of topographical features. In Massey’s case, the mountains of West Virginia in the U.S. are the extraction point.
As with any pressing national issue, the economic outlook is among the foremost concerns with mountaintop removal. As a major commodity, Wall Street has become heavily involved in the purchase and trade of the resource. The coal business has evolved into a multi-faceted market that includes coal futures, financial instruments used to hedge risks for both banks and energy companies in sales and trading. Depending on the market conditions each day, coal of high quality can hover anywhere in the $65 to $90 per ton range. The scarcity of coal and the market that has developed around the resource make Massey Energy, one of the top five extractors of coal in U.S., a powerhouse—$2.72 billion USD in reported revenue in 2009, just under 6,000 full-time employees, and over 50 operating mines.
However, developments within the last year have endangered the welfare of the company. Public attention was drawn to Massey Energy after an underground mine collapsed in April 2010. The tragedy at the company’s Upper Big Branch mine in West Virginia killed 29 people when methane gas built up and caused an explosion. This did not occur at a surface mine, but pressure was already mounting from environmentalist groups throughout the country on the mountaintop removal issue. With Massey’s stock prices already falling due to the disaster, banks and shareholders took notice.
Several banks had reduced financing to Massey Energy back in 2008. For example, JPMorgan Chase was heavily involved in underwriting debt securities and managing trades for the company until the bank informally parted with Massey two years ago. Bank of America is reportedly distancing itself from companies engaging in mountaintop removal practices due to groundwater contamination, perhaps the biggest environmental impact of the extraction method. These developments have been reflected in the company’s share prices over the past six months, declining sharply after the mining disaster, beginning to recover, and declining again without sustained support from major banks.
Major companies are not the only economic agents pressuring Massey Energy to change its practices. According to ABC News’ Rich Blake, “New York City and New York State comptrollers' offices have pushed Massey, through shareholder resolutions, to adopt carbon emissions reduction strategies as well as improved corporate governance policies." Such actions signal a public discontent with the practices—a vital part of the environmental markets in the U.S. since a more formal system does not exist.
However, the decision and its implications are not as simple as calling an immediate end to the practice and have some substantial ramifications.
As mentioned above, Massey Energy employs a large number of people—entire towns in states like West Virginia rely on the profitability of companies like Massey Energy for their livelihoods. The U.S. government clearly has a stake in the debate as well, as energy security is as much an economic issue as a political one. Each of these parties would be impacted in some way by a partial or complete ban on mountaintop removal.
Massey Energy makes the economic argument the cornerstone of their position. Coal extracted through
mountaintop mining accounts for ten percent of domestic output throughout the industry as a
whole; in some areas, like West Virginia, this number is as high as thirty percent. The company argues that the efficiency keeps coal prices lower—underground mining is more labor-intensive, involves more risk, and is an all around more expensive endeavor. Estimates assert that between two and three times as much coal can be recovered per every worker’s hour using mountaintop mining than is possible in underground mining. This would appear to make a significant difference to major coal suppliers. However, even with this higher efficiency, proposed governmental restrictions on using the method would reportedly only raise national coal prices $1 to $2 per ton, which is not a large deviation from the average $50-$60 per ton energy companies pay now. At the 40 million tons that Massey Energy currently extracts per year, this is a $40 million to $80 million difference in revenue stream. However, drawing on previous information, only about ten percent is extracted through mountaintop removal. If the $1to $2 per ton applied only to this ten percent, this is only a $4 million to $8 million difference— negligible compared to revenue of over $2 billion annually.
Massey Energy also makes the job loss argument when confronted with the idea of placing restrictions on mountaintop mining. One of its primary locations, West Virginia, is a prime example for the company to use. While no reputable numbers on job losses have been proposed, a legitimate fear is that coal would be replaced with cheaper energy sources or brought in from other states where mining is cheaper. However, more convincing evidence points to the contrary: mountaintop removal seems to replace the need for workers, as it is more efficient and less labor-intensive. Higher productivity per worker seems to have outpaced the increased demand for coal, as a decline in the workforce of miners has occurred over the past fifty to sixty years. An estimated 125,000 to 145,000 miners were employed in West Virginia in the 1950s, which declined to under 20,000 in the early 2000s. During this same time, the amount of coal produced increased greatly. In addition, according to the latest U.S. Census data available, the median household income in West Virginia in 2008 was $37,528—a vast disparity from the U.S. median of $52,029. 17.4% of households lived below the poverty line in contrast to the 13.2% U.S. average. This number was lower in 1979—15 percent—prior to the rise of mountaintop and surface mining. Simply put, in their race to keep production in step with demand, coal companies have left local communities in shambles yet continue to stake claim to the state’s well-being.
Aside from the human perspective, this mining method has had vast environmental impacts. Most forms of mountaintop mining involve valley fills, which means that the debris from explosions to expose coal are moved into surrounding valleys—often homes to streams and forests full of ecosystems. The debris includes rock, remains of trees and vegetation, and contaminants from the mining process. In essence, the valleys serve as wastelands for the mountaintops that have been blown to pieces to extract coal. A recent study, published by Dr. Margaret Palmer and other prominent scientists in Science Magazine, estimated that multiple watersheds in West Virginia have over ten percent of their total area “disturbed by surface mining.” The study states that if just five to ten percent of a watershed’s area is “affected by anthropogenic activities,” there are considerable threats to biodiversity and water quality. These changes are directly associated with mining, as a “significant linear increases in the concentrations of metals, as well as decreases in multiple measures of biological health, were associated with increases in stream water sulfate in streams below mined sites.”
Mountaintop mining also removes the habitats of indigenous species living on the mountains and in forests, then destroys the ecosystems in the valleys below. Streams carry water, nutrients, and organisms over long distances (if they are not stifled completely by the debris)—a recipe for widespread environmental degradation. An estimated 1,200 miles of streams in the Appalachian region have been affected.
