A recent coal mine bankruptcy has revealed regulatory failings that could leave U.S. taxpayers on the hook for billions of dollars in remediation payments, according to environmental advocacy groups.
In March, a North Carolina judge approved a Chapter 11 bankruptcy plan for Blackjewel, formerly the sixth-largest coal producer in the country. The plan included provisions for the sale of more than 200 mining permits across Kentucky, West Virginia, Virginia and Tennessee.
But with the coal sector in terminal decline, most of the permits will go unclaimed — so remediation work on the mines could remain in limbo.
Worse still, Blackjewel's bankruptcy could be a glimpse of things to come as the coal industry founders without having made adequate provisions for cleanup work, Sierra Club senior attorney Peter Morgan told Canary Media in an interview.
That’s despite the existence of a 1977 law called the Surface Mining Control and Reclamation Act, which was intended to make coal mining firms responsible for their own messes.
A well-intended regulatory framework
Before the law was enacted, companies would come in, strip-mine an area, and then, once all the profitable coal had been removed, just walk away, Morgan said.
The Surface Mining Control and Reclamation Act (SMCRA) established an Abandoned Mine Land program to cover reclamation costs for mines opened prior to the law's start date. It was funded through taxes on coal and lignite production.
It also required that newly established mines set aside funds for cleanup operations.
“The heart of the [law] was the idea that before a company can move a shovelful of dirt on a coal mine site, they have to post a financial assurance so that the regulator could complete reclamation in the event that the company abandoned the mine,” said Morgan.
Loopholes in the reclamation law
That sounds good on paper. But in practice, SMCRA isn’t working, for two reasons. The first is that the financial assurance system had loopholes baked in from the start.
Ideally, the assurance would be in the form of a surety bond issued by a third party, such as an insurance company.
In practice, though, some states allow for self-bonding, where the regulator has to trust that the mining company has set aside enough money for remediation, and pool bonding, which allows several firms to pay into a single bond.
These bonding mechanisms come with little regulatory oversight and thus are susceptible to underfunding.
Then there’s the second issue with SMCRA: The state regulators entrusted with upholding the law have often seemed to be more interested in making life easy for mining companies than protecting the environment.
As a result, regulators have failed to require bonds to be set at amounts adequate to cover the costs of reclamation. “So even when it is a reliable third-party surety bond, it often turns out that the money is not enough,” said Morgan.
The mining industry is changing
This wouldn’t be a problem if mining bankruptcies were rare, because the mining industry could still meet its reclamation costs over time.
But that is no longer the case. A report published last year by the nonprofit Reclaiming Appalachia Coalition found that more than 50 coal companies have gone bankrupt in the last decade.
Even that in itself might not be an issue, since many recent high-profile bankruptcies, including those of market leaders Alpha Natural Resources, Arch Coal and Peabody Energy, were more about shedding debt than abandoning mines altogether.
The mining companies would usually re-enter the market at some point, and some mines might change hands. But some entity or other would usually retain responsibility for operating and cleaning up the mining operations.
That wasn’t the case with Blackjewel. The mining firm simply abandoned 33 of its 204 mining permits, leaving the Kentucky regulator with an estimated $20 million shortfall for cleanup work after bonds had been taken into account.
No new takers for old mines
The move has alarmed advocacy groups such as Appalachian Citizens' Law Center, Sierra Club and Kentuckians for the Commonwealth. It indicates that there might be a dwindling appetite for mining operators to take over debt-laden mines.
Previously, major players such as Alpha, Arch and Peabody had always been able to find smaller companies to take mines with high outstanding reclamation obligations off their hands. But “one of those companies was Blackjewel,” Morgan said.
“That strategy, which the state regulators were happy to sign off on, was not avoiding the reclamation crisis,” he said. “It was just delaying it. Companies and regulators were kicking the can down the road. But they’ve now run out of road.”
To make matters worse, even if a responsible mining company were willing to post a reasonable surety bond today, they might not find an insurer willing to take on the risk.
Legacy surety companies, usually specialist subsidiaries of multinational insurers, have been exiting the coal mining industry in recent years.
Running out of surety issuers
They have left the business to smaller, specialist firms such as Indemnity National Insurance, which may be undercapitalized.
This was made evident when the not-so-aptly-named Earth Restoration Project Compliant Fuels, a mining concern in West Virginia, ran out of cash over a year ago.
When the West Virginia Department of Environmental Protection filed a lawsuit against ERP Compliant Fuels for failing to fulfill its environmental obligations, it became clear that cashing in the company’s surety would bankrupt its insurance provider, Indemnity National.
Indemnity National is also believed to be one of the largest surety bond providers for Blackjewel’s permits.
Perhaps unsurprisingly, not one of the 171 permits that Blackjewel was able to find buyers for has yet been transferred. The acquirers are not able to get surety bonds, Morgan said. Without surety bonds in place, the state regulator will not sign off the transfers.
Thousands of functionally bankrupt mines?
With surety providers now themselves looking vulnerable, there is a fear that this situation applies not just to Blackjewel’s mines but to all mining operations in the Appalachian states, ending the coal industry’s ability to fund future cleanup operations.
There is a growing sense that the U.S. coal industry may be running out of options — and time.
Although around 10,000 coal mines in the U.S. have active permits, only 669 of them were producing coal as of 2019, based on U.S. Energy Information Administration records. (The National Mining Association claims 1,007 were operational in 2020.)
These numbers may indicate that many mining companies are functionally bankrupt and just haven’t entered formal proceedings because they haven’t yet been forced to repay investors.
If their liabilities exceed their assets, then it is hard to see how they will pay for site reclamation. And the sites are not getting any cleaner as time goes by.
Responsibility lies with state regulators
“The problem is [that] if they push these companies into bankruptcy, the regulators become responsible for completing reclamation,” said Morgan. “And they know they did a poor job of securing financial assurances. So they have all the incentive to sit on their hands.”
It is unclear how much money is missing from the pot that was supposed to be set aside to clean up old U.S. coal mines.
Ashley Burke, senior vice president of communications at the National Mining Association, said in an email that coal companies had paid nearly $12 billion into the Abandoned Mine Land (AML) fund over the last 40 years to cover lands dumped prior to SMCRA's enactment in 1977.
“The mining industry has a successful track record in fulfilling its reclamation commitments, and these efforts continue,” she said.
“States are tasked with ensuring adequate financial assurance to cover reclamation obligations. Should a mine be left vacant, then it would then fall to the state AML program, and other companies paying into the AML [fund] would become responsible for reclamation.”
Reclamation costs in the billions
But according to the Sierra Club's Morgan, there is also a shortfall of $12 billion for reclaiming pre-1977 mining sites. Plus, there is an undetermined amount due for operations that commenced after that date. This shortfall is likely to be less than the one facing AML because U.S. mining activity has steadily declined since 1977.
And most mines can be assumed to have paid for sureties accounting for at least a significant proportion of reclamation costs.
Even so, according to a report from the Reclaiming Appalachia Coalition, “At least 490,000 acres of mined land in Central Appalachia require some reclamation. The cost of that reclamation may amount to $6 billion, while available bonds only total $2.5 billion.”
The actual difference may in fact be higher, since mining companies' reclamation estimates tend to be based on the assumption of having people and machines already on site. Remediation costs tend to trend higher the longer a mine is left idle.
What is increasingly evident is that the mining sector will not be able to afford reclamation works, which could force regulators to reduce environmental standards so mine cleanups are cheaper. If not, taxpayers will have to cough up billions of dollars.
Ultimately, said Morgan, “The costs of these un-reclaimed sites are already being paid by the communities...near mines. The question really is: Are we OK with pushing those costs on those communities? Or are we willing to protect those communities?”
(Article image courtesy of Taton Moise)
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