The War on Coal That Never Was

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This piece was first published in Forbes on October 10, 2019. It is reprinted with their permission.

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President Trump has stated that the War on Coal is over, and that his side won.  Yet new research tracking Wall Street’s reaction to major federal environmental policy finds that Trump and Republican allies in Congress claimed victory in a war that never in fact existed.

The research, from regulatory scholars at the University of Pennsylvania and Penn State University, looked at the performance of coal equities in the days immediately following announcements related to three Obama-era regulations that aimed to limit the environmental impact of burning coal in the electric power industry.  As the war on coal narrative would have it, the introduction of those regulations should have soured investors on the outlook for coal and punished shares of coal mining companies.

Yet the research found little investor reaction to the announcement of Obama’s signature climate regulation, the Clean Power Plan, or to two earlier rules targeting toxic emissions from coal-fired power plants.  

To the contrary, the findings of “Whither the Regulatory ‘War on Coal’? Scapegoats, Saviors and Stock Market Reactions” support a reality that Wall Street has long recognized.  Regulation has done little damage to a sector whose declining fortunes are rooted in its own rising costs and, above all else, stiff competition from cheap shale natural gas.

The results also make clear the extent to which the war on coal narrative has been in reality a politically convenient creation of a president, and Republican party, that have catered to fossil fuel interests.  In pushing the war on coal narrative the Administration imagined a straw man of Democratic regulatory overreach, which it then pretended to topple, most notably by refusing to implement the Clean Power Plan.  The storyline provided Trump with an opportunity to paint himself as a savior to coal constituencies when he was, in fact, incapable of arresting a coal decline rooted in economics rather than policy.

The report authors, Cary Coglianese of the Penn Program on Regulation at the University of Pennsylvania Law School and Dan Walters of Penn State Law School, examined investor reaction to three signature coal-related regulations that were part of Obama’s “Climate Action Plan,” and which aimed to address emissions from an aging coal fleet.  The earliest of the regulations, the Cross State Air Pollution Rule proposed by the EPA in 2010, sought to hold upwind states accountable for ozone-forming pollutants that their coal powerplants sent to their neighboring states.  CSAPR was finalized in 2011, overturned by the D.C. Circuit Court of Appeals in 2012, and that ruling was subsequently reversed by the Supreme Court two years later, paving the way for the rule to go into effect.  (This October the D.C. Circuit Court struck down another attempt to undo CSAPR).

The ping-pong of regulatory announcements and down-up court rulings provided Coglianese and Walters with ample opportunity to test investors’ reaction to the rule.  To comply with CSAPR, utilities would need to install emissions reduction equipment in certain existing coal-fired powerplants and, where modifications wouldn’t be cost effective, would likely retire the plants, resulting in a corresponding reduction in coal demand.

In their event analysis, Coglianese and Walters found little consistency in the stock market reaction one, two, or three days following the EPA’s introduction and finalization of the rule, or in the wake of the Supreme Court’s defense of CSAPR.  In fact, the only statistically significant stock market response that would be consistent with the war on coal narrative occurred during the second day following EPA’s signing of the proposed rule in 2010, when coal mining equities fell 1.6%.

Yet the researchers subjected their data to a further “difference-of-differences” analysis that tracked the relative performance of coal and natural gas stocks following the introduction of new environmental rules.  

Simply put, bad news for coal would mean new opportunity for gas in the electricity generation market.  Coglianese and Walters found that in half of the events they tested, the results were opposite those predicted by a regulatory war on coal.  Further, coal stocks outperformed natural gas equities to a statistically significant degree following the Supreme Court’s reinstating of CSAPR, exactly opposite the outcome the war on coal would expect.

In sum, those with ample skin in the coal game, namely investors, barely noticed the regulatory developments, if they took note at all.  The researchers’ examination of a second rule, the Mercury and Air Toxics Standards (MATS), which the EPA finalized in 2012, turned up an equally murky mix of statistically insignificant and counterintuitive stock market reactions.

The most damning result for supporters of the war on coal narrative came when the pair turned their attention to the Clean Power Plan, the first nationwide regulation to expressly target carbon dioxide emissions.  In 2016 the Supreme Court broke precedent by issuing a surprise stay of the Clean Power Plan, which was at the time on track to go into effect.

“This is arguably the most useful event in the paper for testing claims about the war on coal because it was a very important part of the Obama climate policy and strategy, and because it was a complete shock,” says Coglianese.

“It was unprecedented for the Supreme court to intervene in this manner in the regulatory process.”

The surprise caught investors off guard in a way that previous announcements related to Obama’s Climate Action Plan had not.  Yet, even where investor expectations weren’t already “baked into” the market, shares failed to react as the war on coal narrative would predict.

One conclusion might be that there is a tenuous cause-and-effect relationship between regulatory announcements and Wall Street behavior.  Yet Coglianese and Walters performed a robustness check of their methodology by looking at regulations that directly impact coal mine operations, including regulations designed to protect water quality.  Here, the pair note, there was a statistically significant stock market reaction.

“That result made it all the more surprising that, when it came to the canonical war on coal regulations, we were just not finding impacts,” says Coglianese.

All of which calls attention back to the real reason for coal’s decline – simple economics.  As the CEO of South Carolina’s Santee Cooper electric utility noted in August, despite Trump’s efforts to revive coal, the utility is getting out of the coal-fired power business.  Coal “doesn’t make any sense either economically or environmentally.”

So, why is it that war on coal rhetoric just won’t go away?

As the subtitle of Coglianese and Walter’s report suggests, the allure of scapegoats, and the chance to frame oneself as savior, are too politically attractive to pass up.