1. What is the deal that legislative leaders have promised to Peabody Energy?

2. How do these subsidies compare to other economic development packages offered by Kentucky?

3. Who is eligible for these subsidies?

4. Does Kentucky already provide tax-breaks and subsidies for the coal industry?

5. What is coal conversion?

6. How will subsidizing coal conversion affect mining?

7. How will subsidizing coal conversion affect economic development in Kentucky?

8. How would this plan affect the funds that are supposed to help coal-producing counties diversify their economy?

9. What is the impact of coal conversion on global warming?

What is the deal that legislative leaders have promised to Peabody Energy?

On July 25, 2007 Governor Fletcher, House Speaker Jody Richards and Senate President David Williams struck a deal with Peabody Energy – the world’s largest coal company. The company agreed to recommend that its investors approve a plan to build a new coal-to-natural-gas plant in Kentucky if the legislature will hold a special session this summer to pass a package of new tax incentives worth $300 million for Peabody.

The actual legislation may not be made public until hours before the legislature meets. However, it is expected to look an awful lot like Senate Bill 1, a piece of legislation passed by the Kentucky Senate in early July. That bill contained four new subsidies for any company seeking to build a coal-to-liquid or coal-to-gas plant in the state, including:

• An income tax rebate worth 80% of the income taxes collected from employees who work at the facility, including construction-related employment, for 25 years. (This means that 80% of the personal income taxes paid by employees working at one of these facilities would be returned to the company rather than going to the state’s General Fund for schools, health care and other public structures.)

• A corporate tax exemption for 80% of corporate income taxes or limited liability taxes owed for 25 years.

• A sales tax exemption worth 100% of taxes paid on purchases related to construction, retrofit or upgrade of a facility, with no cap, for 25 years.

• A coal severance tax rebate worth up to 80% of the severance taxes collected on coal that is used by the facility, for 25 years.

How do these subsidies compare to other economic development packages offered by Kentucky?

The incentives for the coal industry that are contained in Senate Bill 1 go beyond anything that Kentucky provides to other employers in several ways:

• The tax breaks for the coal industry are authorized for 25 years, far more than the usual 10 years offered to other companies.

• The coal severance tax rebate in Senate Bill 1 is a new incentive that has not been offered before to any industry. It is worth about half of the total package Peabody is projected to receive from the state under Senate Bill 1.

• The $300 million in tax breaks for Peabody Energy comes out to about $800,000 for each job they say they’ll create. That cost-per-job is 20 times higher than state incentives given to Toyota, Ford Motor Company and UPS. (See Mark Hebert’s blog.)

Who is eligible for these subsidies?

Any company seeking to build a “coal conversion” plant in Kentucky would be eligible for these subsidies. So far four companies have written letters to Governor Fletcher urging him to call a special legislative session so that they can take advantage of the subsidies. Peabody Energy, the largest coal company in the world, has been the most visible of these industry players. But other companies are waiting in the wings if the legislation passes. Each of them could potentially receive a similar deal, worth hundreds of millions in taxpayer dollars.

Does Kentucky already provide tax-breaks and subsidies for the coal industry?

Yes. KFTC has calculated that taxpayers give the coal industry in Kentucky about $100 million a year in tax breaks and direct subsidies. These include tax breaks for switching from another heating source to a coal-fired heating system, tax breaks to utility companies that increase their use of coal in a given year, and a sales tax exemption on coal used to generate electricity in Kentucky.

Despite the state’s heavy subsidies for the coal industry, our existing laws do not allow economic development incentives to go to mining or coal related businesses. That restriction exists for a number of reasons, including the fact that the coal isn’t going anywhere, so it shouldn’t be necessary to provide incentives for coal companies to locate here. Also, many of our existing economic development laws were written to help diversify the economies of Kentucky’s distressed communities where large numbers of people live in poverty despite (or because of) a century of coal mining.

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What is coal conversion?

“Coal conversion” is a term used to refer the process of turning coal into synthetic diesel fuel or natural gas. This process represents the dirtiest and most expensive path Americans could take as we search for solutions to global warming and to reduce the harm caused by mining and burning coal.

The technology to convert coal into synthetic fuel was commercialized by Germany during World War II and South Africa during the Apartheid era, two military regimes that were isolated by the international community and blocked from access to foreign oil.

The process is extremely expensive and inefficient. One ton of coal produces just 2 barrels of fuel.  Construction costs for coal-to-liquid fuel plants were estimated in 2004 to be $7 billion each, almost 4 times higher than for petroleum refineries. This estimate does not include the cost to capture and store carbon dioxide, a technological fix that does not yet exist on a commercial scale but is often promised by the coal industry.

Until recently, these costs have prevented companies from building coal conversion plants in the US and other parts of the world. However, the coal industry has now launched an aggressive political effort to win public subsidies worth tens of billions in federal and state tax dollars. Their plans are spelled out in a 2006 report issued by the National Coal Council called Coal: America’s Energy Future.

How will subsidizing coal conversion affect mining?

Public subsidies for coal conversion will increase the pressure to mine in ecologically sensitive areas like eastern Kentucky’s steep-slope mountains and western Kentucky’s fertile farmlands. These communities are already under assault from mountaintop removal mining and other destructive mining practices. In recent decades, at least 1,200 miles of headwater mountain streams have been buried under valley fills caused by surface coal mining and more than 400 individual mountains have been erased.

Peabody Energy predicts that building one coal-to-gas plant in western Kentucky will increase demand for coal by 5-7 million tons per year. This would have the effect of increasing mining in Kentucky by more than 4% annually, compared with total coal production in 2005. And that is just a start. The National Coal Council’s 2006 report called for replacing 10% of America’s transportation fuels with liquid coal, an achievement that would increase mining in the US by 43%.

How will subsidizing coal conversion affect economic development in Kentucky?

KFTC believes this scheme will harm, not help, Kentucky’s efforts to develop a thriving, diverse economy, especially in distressed coalfield communities.

The most optimistic projections estimate that Peabody Energy’s plan would create 375 permanent jobs with a $300 million subsidy from the state. That’s $800,000 per job, a per-job cost that is 20 times more than economic development deals offered to Toyota, Ford Motor Company and UPS!

However, any analysis also needs to consider the fact that many of these new jobs would be in mining, a dangerous and polluting industry that extracts value from our state while pushing many costs onto the backs of local governments, residents and workers. There is little evidence that increased mining is a path to a more prosperous future. On the contrary, the counties in Kentucky that have produced the most coal over the past 100 years are among the poorest in the state. For examples, see these county profiles.

How would this plan affect the funds that are supposed to help coal-producing counties diversify their economy?

This legislation will reduce the funds available to coalfield counties to build and diversify the local and regional economy over the next several decades by tens of millions of dollars.

This is true because the legislation contains a provision that would give any company that builds a coal-conversion plant in Kentucky a rebate worth up to 80% of the severance taxes paid on the coal that they burn. If Peabody Energy’s facility burns 5 million tons of coal annually as projected, it would receive a severance tax rebate worth about $5.4 million each year for 25 years or $135 million in total!

The coal industry and some legislators argue that giving Peabody this rebate won’t decrease the amount of severance taxes received by coalfield counties. They explain that the coal used to feed these coal conversion plants would be “new coal,” meaning it is coal that would not have been mined at this time if a coal conversion plant(s) did not exist.  They say that the overall increase in coal severance funds from “new coal” will offset any potential reduction in funds returned locally.

Several problems exist with this argument. First, there is no such thing as “new coal.” Coal is coal, and regardless of when you mine it there is a finite supply, and a finite amount of severance taxes that will ever be paid for extracting it. If the coal industry is allowed to receive 80% of the taxes paid on coal they use at coal conversion plants, those severance funds are forever lost to local communities. And if a primary purpose of the coal severance tax is to fund communities’ efforts to counteract the loss of natural resources and to create a sustainable economy, then giving coal severance funds back to the coal industry is taking Kentucky in the wrong direction.

Finally, it is important to understand that severance taxes are returned to each coal county based on a formula that takes into account that county’s percentage of total coal production in the state. Because of this fact, most of Kentucky’s coal producing counties will see their severance tax dollars decrease under this plan, while a few may see their revenues increase slightly in the short term.

What is the impact of coal conversion on global warming?

Synthetic fuels produced from coal will generate twice as much carbon dioxide, a major contributor to global warming, as conventional fuels. That's because so much carbon dioxide is released during the process of creating the fuel from coal (one ton of carbon pollution for every barrel of fuel produced), and then more is produced when the synthetic fuel is used. According to a July 2007 editorial in Scientific American, using these fuels would have the effect of "turning a Prius into a Hummer" in terms of their contribution to global climate change.

Many legislators have recently promised that the proposed legislation will require any plant receiving state subsidies to be "ready" to capture and store carbon emissions if and when federal laws require it. Simply put, that means nothing. Any coal-gasification plant is "ready" to capture and store carbon. All it needs is a) a working technology to be developed and b) the money to invest in that technology.

It is important to understand that industry engineers estimate that such technology is at least 25 years away, if it is feasible at all.