Financial and Regulatory Incentives for U.S. Coal Mine Methane Recovery Projects

Transcription

1 U.S. EPA Coalbed Methane OUTREACH PROGRAM Financial and Regulatory Incentives for U.S. Coal Mine Methane Recovery Projects U.S. Environmental Protection Agency August 2011 EP-W

2 Financial and Regulatory Incentives for U.S. Coal Mine Methane Recovery Projects Introduction Coal mine methane (CMM) is a major source of anthropogenic methane emissions. In the United States (U.S.) alone, 2009 CMM emissions from active and abandoned coal mines reportedly exceeded 150 billion cubic feet (Bcf). 1 Worldwide, CMM emissions amounted to 6 percent of total emissions in Considerable progress in the U.S. has been made to date in reducing CMM emissions, which by 2009 had dropped 16 percent below 1990 levels. Continuing this pace of emissions reductions will be challenging for several reasons: Major coal mines in the Appalachian and Black Warrior Basins that historically emitted significant CMM volumes are now capturing and selling or destroying the gas. Without meaningful long-term financial assurances and incentives, regulatory imperatives to reduce these emissions, or comprehensive climate change legislation, venting CMM to the atmosphere will likely continue to be the modus operandi for degasifying underground mines to protect miners safety. CMM emission reduction projects require significant capital investments and are financially risky because of the unpredictable nature of CMM gas production from a mine, making it challenging to forecast a project s economic feasibility. In response to the recent recession and to growing concerns about greenhouse gas (GHG) emissions and energy independence, U.S. federal and state governments individually and collectively through regional partnerships have taken important steps to further job creation through development of clean energy and carbon emission reduction projects that address climate change concerns. 3 Government policies and programs have focused on several key objectives: Spurring economic activity, investment, and job growth through gas and electric infrastructure construction and improvements and clean energy innovation and technology development. 4 Increasing energy efficiency and developing renewable and other forms of domestic energy to reduce energy dependence on foreign countries. 5 Inventorying and reducing GHG emissions through voluntary or mandatory programs. 6 The primary purpose of this analysis is to examine selected energy and GHG governmental and voluntary programs that include financial and regulatory incentives and mandates focusing on the capture and use, sale, or destruction of CMM (CMM Recovery Projects). The analysis also examines recent federal and U.S. Environmental Protection Agency (U.S. EPA) coal emissions inventory data. 2 U.S. EPA, EPA REPORT 430-R , GLOBAL ANTHROPOGENIC EMISSIONS OF NON-CO 2 GREENHOUSE GASES: (2006), available at 3 Robert Stavins, AB 32, RGGI, and Climate Change: The National Context of State Policies for a Global Commons Problem, (2010) [hereinafter Stavins], available at 4 American Recovery and Reinvestment Act of 2009, 3, Pub. L. No (February 17, 2009), available at 5 Energy Independence and Security Act of 2007 (Pub.L ), available at 6 MANDATORY REPORTING OF GREENHOUSE GASES, EPA HQ OAR ; FRL , 74 Fed. Reg. 56,260 (Oct. 30, 2009) (to be codified at 40 C.F.R. Parts 86, 87, 89, 90, 94, 98, 1033, 1039, 1042, 1045, 1048, 1051, 1054, 1065), available at 1

3 state legislation, enacted and proposed, as well as regulatory action and regional GHG agreements that may facilitate or guide development of the next generation of CMM Recovery Projects. 7 Specific U.S. GHG programs and policies discussed in this report include: 1. Government efforts to reduce GHG emissions (including CMM) through: a. Federal energy and climate change legislative proposals to reduce GHG emissions through market mechanisms (cap-and-trade) at a national level; b. Federal reporting and regulation of stationary GHG emission sources under the Clean Air Act; c. Regional cap-and-trade carbon offset programs; and d. California s Global Warming Solutions Act of 2006 (AB 32) Voluntary GHG registries and carbon markets. 3. State alternative energy and renewable energy programs such as those in Pennsylvania, West Virginia, Ohio, and Utah that expressly include CMM as a targeted energy resource Federal and state capital investment, loans, and tax benefits and credits for CMM Recovery Project development. 5. Regulatory incentives in the form of royalty relief and other rights granted in coal or oil and gas leases and amendments allowing mine operators to utilize or destroy CMM. Finally, this report examines similar programs in Australia, Germany, and China that support CMM Recovery Projects by providing among other things funding for technology research and development, permits suspending carbon emission cap requirements, tax incentives, and feed-in energy tariffs. 10 Governmental Efforts to Reduce GHG Emissions Various legislative and regulatory initiatives to reduce GHG emissions have been proposed or enacted at the federal, regional, and state levels. Some of these programs directly reference CMM; others, in their current form, do not include CMM but have the potential to do so (e.g., by amending the approved offset project type to include CMM Recovery Projects). a. Federal Energy and Climate Change Legislation In 2009, the first year of the 111 th Congress, more than 40 bills were introduced relating to methane emissions, although none were enacted into law. 11 Three major legislative proposals addressed a wide range of energy, cap-and-trade, and CMM recovery issues: American Clean Energy and Security Act of 2009 (H.R. 2454) was passed in the House of 7 This paper does not address CMM education/information dissemination through programs such as U.S. EPA s Coalbed Methane Outreach Program (CMOP), or the Global Methane Initiative (formerly the Methane to Markets Partnership), which provide CMM technology transfer. These programs are amply dealt with in other articles and reports. See and 8 See Cal. Health & Safety Code (2010) available at For an analysis of AB 32, see also Institute for Local Government, AB 32 s Impacts on Local Government: A Local Official s Guide, (2010), available at 9 See infra. 10 Agency for Rational Energy Use and Ecology and Battelle Memorial Institute, Analysis of International Best Practices for Coal Mine Methane Recovery and Utilization (2009), available at 11 CONG. RESEARCH SERV. R40813, METHANE CAPTURE: OPTIONS FOR GREENHOUSE GAS EMISSION REDUCTION, pg. 10 (2009). [hereinafter Methane Capture Options] available at 2

4 Representatives on June 26, 2009, and placed on the Senate Legislative Calendar under General Orders. 12 The legislation included a national GHG emission cap-and-trade system and provided that CMM used to generate electricity at a mine be qualified as a clean energy resource. 13 Clean Energy Jobs and American Power Act (S. 1733) was introduced in the Senate and was passed in the Committee on Environment and Public Works on November 5, Among other things, the bill proposed a cap-and-trade program that included CMM as an offset and declared it was U.S. policy to support the growth of voluntary renewable energy markets. 15 Consolidated Land, Energy, and Aquatic Resources Act of 2009 (H.R. 3534) was passed in the House of Representatives on July 30, 2010, and placed on the Senate Legislative Calendar under General Orders. 16 The legislation required federal coal lessees to capture and sell or flare CMM associated with leased coal to the maximum extent feasible, taking into account the economics of the mining and methane capture operations. 17 In the 112 th Congress, there has been a shift in legislative priorities with leadership changes in the House of Representatives. More attention is being focused on promoting domestic energy sources of all types, particularly fossil fuels and nuclear, with a lesser emphasis on climate change and renewable energy. 18 b. Federal Reporting and Regulation of GHGs under the Clean Air Act In a 2007 landmark decision, the U.S. Supreme Court held in Massachusetts v. EPA, 19 that the U.S. EPA had authority under the Clean Air Act (CAA) to regulate GHG emissions as an air pollutant. 20 In response to the decision, U.S. EPA took the following action: Endangerment Finding: In December 2009, U.S. EPA Administrator Lisa P. Jackson made a determination that current and projected concentrations of six GHGs (including methane) taken in combination endanger both the public health and public welfare of current and future generations. 21 New Source Review: Under the CAA s New Source Review permitting program, U.S. EPA implemented a GHG emissions reporting and permitting program for large stationary sources emitting more than 25,000 metric tons (mt) of GHGs or the carbon dioxide equivalent (CO 2 e) per year. Facilities that exceed GHG emission thresholds, including underground coal mines, must demonstrate they are using best practices technologies (such as best available control technology or BACT ) to minimize GHG emissions. 22 Tailoring Rule: In May 2010, U.S. EPA issued a final rule (referred to as the Tailoring Rule ) addressing GHG emissions from large new and existing stationary sources that will be subject to Methane Capture Options, pg CONG. RESEARCH SERV., Summary of S. 1733: Clean Energy Jobs and American Power Act, available at Methane Capture Options, pg Massachusetts. v. EPA, 549 U.S. 497 (2007) U.S.C. 7602(g) defines air pollutant as any air pollution agent or combination of such agents, including any physical, chemical, biological, radioactive substance or matter which is emitted into or otherwise enters the ambient air. 21 Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act, EPA HQ OAR ; FRL , 74 Fed. Reg. 66,496 (Dec. 15, 2009) (to be codified at 40 C.F.R. Chapter I), available at 22 U.S. EPA, New Source Review (NSR) Fact Sheet Proposed Rule: Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, (last visited November 30, 2010). 3

5 the CAA s New Source Review Prevention of Significant Deterioration (PSD) and Title V Operating Permit (Title V Permit) programs beginning on January 2, The Tailoring Rule sets annual mtco 2 e thresholds that define when PSD and Title V Operating Permits are required and establishes a two-step schedule for phasing in CAA permitting from January 2, 2011 through June 30, Large existing coal mines and oil and gas installations will be subject to Title V; however, no new controls will be required. Requirements to comply with PSD will not be triggered for existing mines unless they construct or modify facilities in a manner that significantly increases GHG emissions. 24 On December 23, 2010, EPA issued a series of rules putting the necessary regulatory framework to ensure that (i) industrial facilities can obtain CAA permits covering GHG emissions when needed, and (ii) facilities emitting GHGs below levels established in the Tailoring Rule are not required to obtain federal CAA permits. 25 GHG Reporting Program: The final rule for Mandatory Reporting of Greenhouse Gases from underground coal mines (Subpart FF) was issued in mid-2010, and monitoring of facilities subject to this subpart of the rule is required beginning January 1, The first report is due to the U.S. EPA on March 31, 2012 and annually thereafter. Underground coal mines subject to Subpart FF include mines under development, mines categorized by the Mine Safety and Health Administration as active (i.e., where coal is being produced or has been produced within the previous 90 days), and mines that have operational pre-mining degasification systems. Abandoned (closed) mines, surface coal mines, and post-coal mining activities are not included in this source category. 27 c. Regional Cap-and-Trade Carbon Offset Programs A number of states are engaged in collaborative efforts to address concerns regarding climate change. 28 Three regional GHG programs in the U.S. and Canada are in various stages of development: the Northeast and Mid-Atlantic Regional Greenhouse Gas Initiative (RGGI), Western Climate Initiative (WCI), and Midwestern GHG Reduction Accord (MGGRA, or the Accord ). Together, the programs include 23 states and four Canadian provinces, and account for more than one-third of U.S. GHG emissions and half of Canadian GHG emissions. In May 2010, RGGI, the Accord, and WCI s Working Group issued a joint whitepaper Ensuring Offset Quality: Design and Implementation Criteria for a High-Quality Offset Program 29 that: Sets forth key design and implementation requirements for offsets programs to facilitate potential future linking of regional cap-and-trade programs; and Provides actual operational experience and cost data for decision-making on climate change policy. 23 U.S. EPA s effort to limit or tailor the application of the PSD and Title V Permit program to facilities exceeding GHG emission thresholds is referred to as the Tailoring Rule, available at 24 U.S. EPA, Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule Webinar presentation (June 2010), available at see also 26 Mandatory Reporting of Greenhouse Gases from Magnesium Production, Underground Coal Mines, Industrial Wastewater Treatment, and Industrial Waste Landfills, EPA HQ OAR , FRL (June 10, 2010) (to be codified at 40 C.F.R. Parts 98), available at 27 U.S. EPA, GREENHOUSE GAS REPORTING PROGRAM, UNDERGROUND COAL MINES, subpart FF (2010), available at 28 See Stavin, supra note

6 Harmonization of the regional offset programs will create a solid foundation for a more integrated and successful North American carbon market. However, to date, none of the regional offset programs explicitly reference CMM, although that might change as the offset programs evolve. Descriptions of the regional programs are summarized below. Regional Greenhouse Gas Initiative (RGGI) RGGI was established in December 2005 as the first mandatory market-based attempt to reduce GHG emissions and is the only program currently operating. RGGI includes ten northeastern and mid-atlantic states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. States within RGGI have capped and set targets to reduce emissions from the power sector by 10 percent by From , the cap is set at 188 million tons ( million mt) of CO 2 per year, but starting in 2015 that cap will decrease by 2.5 percent per year. All fossil fuel-fired power plants with a capacity of 25 megawatts (MW) or greater within the ten-state region must comply with the RGGI cap. Currently, there are five project categories in RGGI that qualify for CO 2 offset allowances: landfill methane capture and destruction; reduction in emissions of sulfur hexafluoride (SF 6 ) in the electric power sector; carbon sequestration due to afforestation; reduction or avoidance of CO 2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency in the building sector; and avoided methane emissions from agricultural manure management operations. To date, RGGI does not explicitly address CMM emissions reductions as a project category. Western Climate Initiative (WCI) WCI was created in February 2007 as a partnership between several western U.S. states and Canadian provinces that works to develop regional strategies to address climate change. 30 WCI partners include: Arizona, California, Montana, New Mexico, Oregon, Utah, Washington, British Columbia, Manitoba, Ontario, and Quebec. 31 WCI includes a cap-and-trade program to help achieve a GHG emissions reduction goal of 15 percent below 2005 levels by The cap-and-trade program will be fully implemented in 2015, and will cover almost 90 percent of GHG emissions in WCI partner states and provinces, including emissions from electricity generation, industry, transportation, and residential and commercial fuel use. Phase one of the program will begin on January 1, Emission allowances will be issued by each WCI partner jurisdiction to meet its specific emissions goal. In early 2010, WCI evaluated existing offset protocols from 11 different offset programs in agriculture, forestry, and waste management sectors, but it has not yet determined which project types will be included or developed protocols for its offsets program. To date, CMM is not among the project types evaluated by the WCI. Midwestern Greenhouse Gas Reduction Accord (MGGRA) MGGRA was entered into in November 2007, by several mid-western states and a Canadian province to establish a GHG emission reduction program. 32 Members include: Iowa, Illinois, Kansas, Michigan, Minnesota, Wisconsin, and Manitoba. 33 The MGGRA Final Model Rule outlining its cap-and-trade program was released in April 2010, with the goal to reduce GHG emissions from covered sources 20 percent below 2005 levels by December 31, 2010 and 80 percent below 2005 levels by December 31, WCI observers include U.S. states (Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming), Canadian provinces (Nova Scotia, Saskatchewan, Yukon), and Mexican states (Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora, Tamualipas) There are also four MGGRA observer states: Indiana, Ohio, South Dakota, and Ontario. 5

7 Sources subject to the MGGRA cap-and-trade program emitted greater than 25,000 mtco 2 e annually, include stationary fuel combustion at industrial sources and process or other emissions from industrial sources. Coal mine fugitive emissions both active and abandoned fall under the process emissions source category. The MGGRA Final Model Rule includes GHG emissions offset projects; however, to date, no decisions have been made as to the types of offset projects that will be accepted in the program. d. California s Global Warming Solutions Act In 2006, California enacted the Global Warming Solutions Act of 2006, also known as Assembly Bill 32 (AB 32). 34 Pursuant to the act, the California Air Resources Board (ARB) is responsible for preparing a scoping plan to achieve a 2020 target goal of reducing GHG emissions to 1990 levels and reducing GHG emissions to 80 percent below 1990 levels by On December 6, 2007, ARB adopted a regulation requiring mandatory annual reporting of GHG emissions for stationary sources that produce more than 25,000 mtco 2 e, which was effective January A year later in December 2008, ARB accepted the Climate Change Scoping Plan, which includes a range of strategies to meet the GHG emission reduction targets including: direct regulations, alternative compliance mechanisms, voluntary actions, and incentives (monetary and non-monetary). 37 On December 16, 2010, ARB adopted cap-and-trade implementing regulations with the program beginning January 1, The cap-and-trade program establishes a cap covering 85 percent of the state s GHG emissions. The regulation enables California to link up with programs in other states or provinces within the WCI. 38 In addition, ARB adopted revisions to the California GHG reporting regulations to harmonize the program with U.S. EPA s mandatory reporting requirements. 39 The Scoping Plan includes use of offset credits in the cap-and-trade program. So far, there are four proposed project categories (i.e., urban forest, U.S. ozone depleting substances, livestock manure, and U.S. forest) that can qualify as offsets using Climate Action Reserve project protocols. In the future, ARB will evaluate additional offset project types and protocols to accept, including CMM, although there are currently no plans to consider CMM at this time. Voluntary GHG Registries and Carbon Markets There are several voluntary GHG registries operating in the U.S. in which CMM projects are eligible for carbon credits or offsets. The specific GHG registries include the Climate Action Reserve (CAR), Voluntary Carbon Standard (VCS), and American Carbon Registry (ACR). The Chicago Climate Exchange (CCX) previously accepted CMM projects, but shut down at the end of 2010 after ten years of operation. 40 CCX recently launched a new program, the CCX Offsets Registry Program, for that will operate under new rules developed from protocols used in the previous program. The purchase of voluntary carbon credits (mainly to meet corporate environmental stewardship or carbon neutral goals) saw a downturn in 2009, while the increase in the pre-compliance market segment somewhat offset the overall decrease. Compliance credits typically require the use of third-party GHG registries that collect, verify, and track emission reduction data. As a result, more than half of all voluntary carbon offset transactions were listed with registries in 2009, up from about 30 percent in California Global Warming Solutions Act of 2006, Cal. Health & Safety Code div. 25.5, (West 2007) CAL. CODE REGS, tit (2010). 37 CAL. AIR RES. BD, CLIMATE CHANGE SCOPING PLAN A FRAMEWORK FOR CHANGE (2008), available at At the end of 2010, there were 11 projects registered under CCX with a total of 18 million credits issued. In 2009, credit prices averaged $0.90 and dropped to $0.10 in

8 A CMM Recovery Project s eligibility for GHG credits depends on a number of project specifics, such as the project start date, end utilization technology (i.e., electricity generation vs. pipeline sales), origin of methane (i.e., active vs. abandoned mines, surface vs. underground mines), and monitoring and metering techniques. Each GHG registry has its own rules governing project eligibility, additionality, and registration. For example, some registries include ventilation air methane (VAM) projects, while others do not. Some registries accept methane recovered from abandoned mines (AMM) or surface coal mines (SMM), while others only accept methane from active underground mines. Table 1 summarizes key registry features as they pertain to CMM Recovery Projects. Table 1. Major U.S. GHG Registries for CMM Projects* GHG Registry VCS CAR ACR Project Types Registered CMM, AMM, SMM CMM (VAM) N/A *As of December Project Types Eligible CMM, SMM Projects Registered Credits Issued to Date 42 11,330,549 Registered Project Locations US, China, Germany CMM 1 25,931 U.S. U.S. CMM, SMM Eligible Project Locations Worldwide 0 N/A N/A Worldwide a. Comparison of CMM Methodologies Project Location: U.S. CMM Recovery Projects are eligible to be registered on the three GHG registries. CAR only accepts projects in the U.S. and its territories. VCS and ACR accept projects worldwide. Start Date: Projects more than two years old are limited to ACR (after 2000) due to start date eligibility requirements. Coal Mine Type: Methane recovered from underground coal mines is eligible on all three GHG registries, assuming other eligibility parameters are met. The recovery and use of methane from surface and abandoned mines is eligible on VCS and ACR. CAR has no plans at this time to develop an AMM methodology. Methane Utilization Technology: CMM Recovery Projects that combust or destroy methane on site through the use of an approved destruction technology, such as electric power generation units, boilers, heaters, and flares, are eligible on all three GHG registries. CMM projects that either sell methane directly to commercial pipelines or process CMM before delivery to a commercial pipeline are eligible on VCS and ACR. VAM projects are eligible on all three registries. b. Comparison of Carbon Credit Values In 2009, the value of voluntary carbon credits generally ranged from $1-$6/mtCO 2 e on the three GHG registries. CAR credits commanded the highest value (peaking at nearly $10/mtCO 2 e), in part because state-based GHG programs were included as eligible offsets in nearly all proposed federal cap-and-trade bills (none of which were enacted into law, as previously noted). However, the absence of a comprehensive U.S. climate change policy caused a significant decline in carbon credit values in Figure 1 shows the average carbon credit price for the three major U.S. GHG registries for 2009 and

9 Figure 1. Average Carbon Credit Prices at Major U.S. GHG Registries* $6.00 $ $4.00 $3.00 $2.00 $1.00 $0.00 ACR VCS CAR *As of December Renewable and Alternative Energy Programs a. Federal Legislation The Energy Policy Act of 2005 (EPAct 2005) 41 and Executive Order 13423, Strengthening Federal Environmental, Energy, and Transportation Management, 42 directed the Secretary of Energy, to the extent economically feasible and technically practicable, to increase the federal government s utilization of renewable energy to not less than 7.5 percent of total electricity consumed by 2013, of which 3.75 percent of the total is to be provided by renewable energy sources developed after January 1, Renewable energy resources are defined to include solar-electric, solar thermal energy, wind power, landfill gas, hydropower, geothermal energy, fuel cells, certain biomass energy, and biologically derived fuels. The federal law does not establish a national renewable energy policy nor does it include CMM in the definition of renewable energy. b. State Programs As states undertake efforts to meet renewable energy portfolio standards (RPS), 43 consideration should be given to treating CMM similar to landfill gas, which is classified as a renewable energy resource under federal and state laws. 44 Landfills and coal mines generate methane gases over time during industrial-type operations, and efforts to capture and use or destroy CMM are technically similar to measures used to collect and utilize or dispose of landfill gas. Additionally, landfill gas and CMM utilization or destruction provides comparable environmental benefits associated with reducing GHG emissions to the 41 (Pub.L ) Fed. Reg. 3,919 (January 24, 2007). See also United States Department of Energy (U.S. DOE) Office of Energy Efficiency and Renewable Energy Federal Energy Management Program, Renewable Energy Requirement Guidance for EPACT 2005 and Executive Order (2008), [hereinafter U.S. DOE Guidance] available at www1.eere.energy.gov/femp/pdfs/epact05_fedrenewenergyguid.pdf. 43 See CONG. RESEARCH SERV, R34 294, ENERGY INDEPENDENCE AND SECURITY ACT OF 2007, A SUMMARY OF MAJOR PROVISIONS, pg. 2, which describes an RPS, as a program whereby retail electricity suppliers (electric utilities) must provide a minimum amount of electricity from renewable energy resources or purchase tradable credits that represent an equivalent amount of renewable energy production. 44 Energy Policy Act of 2005, Sec. 203(b)(2), 8

10 atmosphere. 45 By including CMM as a renewable energy resource, among other things, electricity generated from CMM could be eligible for the federal renewable energy production tax credit. 46 As of December 2010, 30 states have adopted renewable energy or alternative energy portfolio standards. 47 State statutory definitions of alternative energy vary from state to state and may include traditional renewable energy resources. Within the 15 coal producing states, 48 Pennsylvania, Ohio, and West Virginia, include CMM in their respective statutory definitions of alternative energy, which are discussed below. In 2010, Utah became the only state to include CMM in its definition of renewable energy by adding CMM to the terms waste gas or waste heat. 49 Pennsylvania In 2004, Pennsylvania was the first state to include CMM as an alternative energy fuel in their Alternative Energy Portfolio Standard (AEPS). 50 The AEPS does not distinguish between renewable and alternative energy resources; it designates all sources as alternative energy. Eligible technologies include demandside management, waste coal, CMM, and coal gasification. The AEPS requires each electric distribution company and electric generation supplier that sells electricity to customers in Pennsylvania to supply 18 percent of its electricity from alternative energy resources by 2020, with at least 8 percent from Tier I resources (which includes CMM) by May 31, Ohio Ohio s Alternative Energy Resource Standard (AERS) was created in May The AERS defines renewable energy resources and advanced energy resources, which are then combined under the term alternative energy resource. 52 The AERS applies to electric utilities and electric service companies serving customers in Ohio and requires utilities to provide 25 percent of their retail electricity supply from alternative energy sources by 2025, with at least 50 percent of the alternative energy requirement met by in-state facilities. 53 While CMM was not included as an advanced energy resource in the original law, in July 2009, Sub H.B. 1 amended the definition of advanced energy resource to include methane gas emitted from abandoned coal mines as a renewable energy resource and methane gas emitted from operating or abandoned coal mines as an advanced energy resource. 54 The law also amended the definition of advanced energy project to include projects with technologies, products, activities, or management practices or strategies that facilitate the generation or use of energy that supports reduced energy consumption or production of clean renewable energy. 55 The change enables CMM pipeline sales projects to qualify as advanced energy projects. 45 U.S. DOE Guidance, www1.eere.energy.gov/femp/pdfs/epact05_fedrenewenergyguid.pdf. 46 OHIO REV. CODE ANN., 4928: Competitive Retail Electric Service, available at see also Alabama, Ohio, Pennsylvania, Illinois, Indiana, Maryland, Tennessee, West Virginia, Virginia, Kentucky, Oklahoma, Colorado, Wyoming, Utah, and New Mexico. 49 UTAH. CODE ANN (11)(iv)(A) and (B) and (11)(iv)(A) and (B) (2010). 50 Pennsylvania Public Utility Commission (PUC), 51 Pennsylvania PUC s AEPS website: alt_ energy.aspx, and the Pennsylvania Department of Environmental Protection s website: Id. 54 The 128 th General Assembly of the State of Ohio, available at 55 H.B. 103, st Spec. Sess. (W. Va. 2009), codified at Alternative and Renewable Energy Portfolio Act, W. VA. CODE 24-2F-1 et seq., (2010). 9

11 West Virginia In June 2009, West Virginia enacted the Alternative and Renewable Energy Portfolio Standard (AREPS), requiring investor-owned utilities with more than 30,000 residential customers to supply 25 percent of retail electric sales from eligible alternative and renewable energy resources by Effective January 1, 2015, electric utilities are thereafter required to own alternative and renewable energy credits in an amount equal to a percentage of electricity sold in the preceding year. Credits can be purchased or generated from alternative and renewable energy sources. 5 The AREPS does not establish a minimum contribution from renewable energy sources, and the term alternative energy resources is more broadly defined than the term alternative energy in other states. Alternative energy resources includes CBM and recycled energy such as waste gas, waste fuel or other forms of energy that would otherwise be flared, incinerated, disposed of, or vented, 57 like CMM. In order to qualify as alternative or renewable energy production, the electricity must be produced or purchased from facilities in the PJM Service Territory (the regional transmission group). 58 The AREPS was amended in November 2009, allowing the portfolio standard to be met solely by alternative energy resources with no requirement for renewable resources. 59 Utah In March 2008, Utah established a renewable portfolio goal in the Energy Resource and Carbon Emission Reduction Initiative Act, which is similar to renewable portfolio standards in other states. 60 Under the act, to the extent that it is cost-effective to do so, investor-owned utilities, municipal utilities, and cooperative utilities must use eligible renewable energy sources to account for 20 percent of their 2025 adjusted retail electric sales. Utilities can meet these targets either by producing electricity from an eligible form of renewable energy or by purchasing renewable energy certificates (RECs). In 2010, the Utah legislature passed H.B. 192 Renewable Energy Methane Gas, which amended the definition of renewable energy source to include methane gas from an abandoned coal mine or a coal degassing operation associated with a state-approved mine permit as part of waste gas or waste heat captured or recovered for use as an energy source for an electric generation facility. 61 The amendment was effective as of May 11, Capital Investment Incentives: Grants, Loans, and Tax Benefits and Credits a. Federal Programs A variety of federal programs provide funding to private parties and state, local, and tribal governments in the form of grants, loans, and other financial incentives for development of renewable energy projects and climate change initiatives. Historically, federal tax incentives under the Internal Revenue Code have played key roles in financing the development of unconventional gas (such as coal gas) and renewable energy. Section 29 Tax Credits provided under the Crude Oil Windfall Profit Tax Act of made possible high-risk exploration and development of significant domestic unconventional gas resources. Similarly, Section 45 Production Tax 56 Id. W. VA. CODE 24-2F-5(a) and (c) (2009). See also West Virginia Legislature, available at PJM Interconnection, LLC, 59 H.B. 408, th Spec. Sess. (W. Va. 2010), codified at Alternative and Renewable Energy Portfolio Act, W. VA. CODE 24-2F- 3, -4, -5, and -9 (2010). 60 S.B. 202, Title 10 Municipal Code, Chapter 19 Municipal Electric Utility Carbon Emission Reduction Act, UTAH. CODE ANN et seq. (2009). 61 H.B. 192, 2010 Gen. Sess. (Utah 2010), available at 62 Pub. L. No (1981). 10

12 Credits under EPAct 2005 and the American Recovery and Reinvestment Act of provide tax credits and other benefits for the production of electricity from renewable energy resources such as wind, some forms of biomass, geothermal energy, solar energy, small irrigation power, and municipal solid waste. Similar tax incentives on gas produced and used or sold from CMM Recovery Projects in the current gas market would certainly help to promoting recovery of the resource. In recent years, the federal government has directly contributed research and development funding to a number of CMM Recovery Projects, including demonstration projects to convert CMM to liquefied natural gas and produce pipeline-quality gas and generate electricity through new technologies such a fuel cells. 64 Other federal programs and agencies that may provide financial incentives for U.S. CMM Recovery Projects include: U.S. DOE s National Energy Technology Laboratory (NETL). Through its National Energy Technology Laboratory (NETL), U.S. DOE issues grants for developing advance simulation and visualization capabilities to enhance unconventional gas recovery, which could have applications to CMM resource modeling for surface coal mines with high permeability coals as well as abandoned underground mines. 65 Through an interagency agreement, U.S. EPA and U.S. DOE collaborated and funded the development of a demonstration project to mitigate VAM, carried out by CONSOL Energy and MEGTEC at the closed underground Windsor Mine in West Virginia. 66 U.S. EPA s Climate Showcase Communities Program. In 2009, U.S. EPA launched a competitive grant program to assist local and tribal governments in establishing and implementing climate change initiatives focusing on improving energy efficiency. 67 In 2010, the City of Albuquerque, New Mexico received a grant to develop a project using landfill gas to recycle glass and provide energy to a municipal facility. 68 Public/private efforts to generate electricity with CMM in mining communities could be candidates for this program. Federal Tax Incentives for the Purchase of Equipment and Other Qualified Property. In an effort to energize the economy and create jobs, Congress passed The Small Business Jobs Act of 2010 (2010 Jobs Act) 69 and The Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010), 70 Both acts provide new federal tax benefits for capital investments in business equipment and other qualified property utilized in CMM Recovery Projects. 63 Pub. L. No (February 17, 2009) U.S. DOE National Energy Technology Laboratory, DE-FOA , Unconventional Fossil Energy Funding Opportunity, available at see also, July2010.pdf Id. 69 Small Business Jobs Act of 2010, Pub. L. No (September 27, 2010), 70 Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010, Pub. L. No (December 17, 2010), 11

13 b. State Programs In an effort to attract advanced and renewable energy businesses, states (such as Pennsylvania and Ohio) have adopted programs to provide grants, tax credits, or loan guarantees that are applicable to CMM Recovery Projects. These efforts include: Pennsylvania Grants. The Pennsylvania Energy Development Authority (PEDA) periodically issues grants for alternative energy projects (which include CMM) in the state. 71 PEDA s April 2010 solicitation offered $16 million in total funding (down from $21 million in 2009) to support in-state manufacturing and research projects for a host of technologies or measures and fuels including CMM. Grants are open to private parties and businesses, nonprofits, and Pennsylvania colleges, universities, and municipalities. The maximum individual award in the April 2010 solicitation was $1 million. Applicants are expected to provide some level of documented cost sharing or matching funds. Pennsylvania Tax Credits. In July 2008, the Alternative Energy Investment Fund Act was signed into law establishing a state tax credit of 15 percent of the net cost of alternative energy production projects. 72 Projects must have an expected useful life of at least four years with a maximum tax credit limit of $1,000,000 per taxpayer and total tax credit limit of $5,000,000 for the 2009 program year. The act broadly defines "alternative energy production project" to include a variety of technologies, including facilities that produce energy fueled by CMM. 73 Ohio Loan Guarantees. Ohio s Advanced Energy Program (AEP) was created in 2007 as part of a $1.57 billion bi-partisan job stimulus package to expand job creation and economic development. 74 The AEP provides $150 million over three years to develop the advanced energy industry in Ohio through loans or grants for non-coal and coal projects with awards ranging from $50,000 to $2 million. The program is bond-funded and creates an Advanced Energy Job Stimulus Fund administered by the Ohio Air Quality Development Authority. Funding is available to applicants in the commercial and industrial sectors as well as to local, state, tribal, and federal governmental entities. Regulatory Incentives: Land Use Authorizations and Royalty Relief a. Land Use Authorization In 2008, more than 40 percent of U.S. coal production was from federal and state coal lands in the western United States, where coal and oil and gas rights are generally owned by the government and typically separately leased to coal and oil and gas lessees. 75 The Department of Interior s Bureau of Land Management ( BLM ) manages federal mineral rights. State mineral rights are managed by state departments or agencies, such as the Utah School and Institutional Trust Lands Administration ( Utah Trust Lands Administration ) and Wyoming s Office of State Lands and Investments ( Wyoming Office of State Lands ) H.B. 1, Spec. Sess. No. 1 (Pa. 2008), codified at 73 PA. STAT. ANN to 711. (2010). 73 Pennsylvania PUC, 74 Am. Sub. H.B th Sess. (Ohio General Assembly, Amended Substitute Bill No. 554 (9/12/2008).) Similar to Am. Sub. H.B. 1. H.B. 1, among other things, the legislation provides additional money for the Ohio Coal Development Office and provides for advanced energy projects administered by the OAQDA. See Ohio Bipartisan Job Stimulus Plan, available at 75 EIA, MAJOR U.S. COAL MINES, 2008 (2009), available at 76 Utah School and Institutional Trust Lands Administration, available at and Wyoming s Office of State Lands and Investments, available at 12

14 Through a series of U.S. federal and western state court decisions, CMM has generally been determined to be part of the oil and gas estate and not the coal estate. 77 Severing CMM ownership from the coal estate creates opportunities for disputes between coal and oil and gas operators impeding development of CMM Recovery Projects on government mineral lands. In recent years, federal and state agencies have taken affirmative steps to promote GHG emission reduction efforts and to avoid disputes between underground longwall coal mining operations and oil and gas lessees over CMM utilization or destruction. 78 b. Royalty Relief Royalty waivers or reductions from federal or state agencies for CMM utilized or destroyed on site are an important incentive for projects that are often only marginally economic. Recent efforts to obtain royalty relief include the following: In 2009, BLM s Colorado State Office amended several federal coal leases in connection with a proposed expansion of the West Elk Mine, allowing the mine operator to capture and use or sell CMM, which was defined as: any combustible gas located in, over, under or adjacent to the coal that will or may infiltrate underground mining operations. 79 BLM s addenda to the coal leases allow the mine operator to use the gas royalty free for the benefit of coal extraction at the West Elk Mine. Normally, royalties of 12.5 percent would be due on any CMM captured and used, or sold off the mine premises. 80 In 2010, Utah s Trust Lands Administration and Wyoming s Office of State Lands have either approved or are considering coal or oil and gas lease amendments and royalty waivers or reductions for CMM captured and destroyed at the West Ridge Mine in central Utah and the North Antelope Rochelle Mine in Wyoming s Powder River Basin. 81 International Incentive Programs a. Kyoto Protocol Market Mechanisms The Kyoto Protocol, effective February 16, 2005, is an international agreement linked to the United Nations Framework Convention on Climate Change (UNFCCC) that sets binding targets for reducing GHG emissions. 82 The emission reduction target for major countries amounts to an average of 8 percent of 1990 levels from 2008 to 2012, when the Protocol expires. As of June 2010, 191 countries had signed and ratified the Kyoto Protocol. 83 Countries meet their emission reduction targets through national measures as well as three market-based mechanisms: Emissions trading in the carbon market 77 See, e.g., Michael Cote & Collon Kennedy, Coal Mine Methane: The True Unconventional Gas, A Survey of Issues Concerning Ownership, Control, and Development of Emission Reduction Projects (2010); James A. Holtkamp & Rebecca A. Ryon, Capture of Ventilated Methane from Mining Operations: Ownership, Regulations, and Liability Issues, 55 ROCKY MTN. MIN. L. INST (2009); Robert A. Bassett, James Holtkamp, & Rebecca Ryon, U.S. Laws and Policies Regarding Capturing Methane Gas (2009), 78 See, e.g., UTAH BLM S A POLICY FOR OIL AND GAS LEASING ON LANDS PRESENTLY BEING DEVELOPED FOR UNDERGROUND COAL (March 23, 2001), and BLM Conflict Administration Zones, available at 79 U.S. Dept. of Interior BLM, Addendum to Coal Leases C-1362, COC-56447, COC-67011, C , D , COC-54558, COC (January 14, 2009). 80 Id. 81 Based on authors discussions in 2010 and 2009 with representatives of Utah s Trust Lands Administration and Wyoming s Office of State Lands Id. 13

15 Clean Development Mechanism (CDM) 84 Joint Implementation (JI) Kyoto-based mechanisms have been effective in helping develop CMM projects through carbon financing. As of December 2010, 70 CMM projects are listed under the CDM program and 17 CMM projects are listed under the JI program. 85 Since 2009, prices for carbon emission reductions under the JI (called emission reduction units or ERUs) and CDM (called certified emissions reductions or CERs) have generally ranged between US$15 and US$20 per mtco 2 e emissions reduced. b. Financial and Regulatory Incentives The top countries in terms of CMM emissions projected for 2010 are (in order) China, U.S., Russian Federation, Australia, Ukraine, India, South Africa, Poland, and Germany. 86 All of these countries except the United States have signed and ratified the Kyoto Protocol. 87 The major CMM emitting countries have enacted a variety of distinctive programs and contractual and financial incentives to reduce CMM emissions. Several noteworthy programs instituted in Australia, Germany, and China to optimize CMM utilization and destruction are summarized below. Australia In February 2010, Australia enacted the Carbon Pollution Reduction Scheme ( CPRS ), a comprehensive program to reduce GHG emissions. The CPRS is an emissions trading plan that uses a cap-and-trade mechanism. Included in the CPRS are two targeted programs to mitigate the financial impacts of cap-andtrade on the coal mining industry: the Coal Sector Adjustment Scheme and Coal Mining Abatement Fund. Coal Sector Adjustment Scheme will assist a small number of gassy underground mines facing significant carbon costs under the CPRS. The program provides an administrative allocation of permits to emissions-intensive coal mines each year for five years (delivering about $1.23 billion of assistance). The permits are to be allocated to eligible mines pursuant to a formula in the scheme and will allow operators time to adjust their operations to deal with the price of carbon. 88 Coal Mining Abatement Fund will grant funding for coal sector abatement projects and capital grants with a priority for electricity generation from waste coal mine gas. The initial funding authorization was $270 million. On April 27, 2010, Australia s new Prime Minister delayed CPRS implementation until the end of the current Kyoto Protocol commitment period and only when there is greater clarity on the action of other major economies including the United States, China, and India to address climate change issues Article 12 of the Kyoto Protocol provides a Clean Development Mechanism that enables a country with an emission-reduction or emission-limitation commitment to implement projects in a developing country. These projects can earn saleable certified emission reduction (CER) credits, each equivalent to one tonne of CO 2, which can be counted towards meeting Kyoto targets U.S. EPA, (EPA REPORT 430-R ), GLOBAL ANTHROPOGENIC EMISSIONS OF NON-CO2 GREENHOUSE GASES: (2006), available at

16 Germany Germany s primary policy incentive for CMM recovery and use projects is through a feed-in tariff for CMM used to generate power under the Renewable Energy Sources Act of 2004 (RESA). The RESA requires electric grid system operators to connect plants generating electricity from mine gas to their systems and guarantee priority purchase and transmission of all electricity from such plants. 90 RESA provides a guaranteed fixed payback tariff for 20 years through feed-in tariffs or fees paid for electricity produced from mine gas: At least 7.67 cents per kilowatt-hour (cents/kwh), up to and including a capacity of 500 kilowatts; At least 6.65 cents/kwh, up to and including a capacity of 5 MW; and 6.65 cents/kwh for plants with a capacity of more than 5 MW. 91 An additional fee of 2 cents/kwh will be paid if the mine gas is processed to the quality of natural gas or if electricity is produced from fuel cells, gas turbines, and other designated state of the art generators. 92 The feed-in tariffs have produced excellent results. As of year-end 2010, there were reported to be 47 CMM Recovery Projects in Germany, including 36 at abandoned mines. Of the 47 CMM Recovery Projects, 33 generate electricity and 14 use methane for combined heat and power. The power generation projects together account for nearly 175 MW of electricity generating capacity. 93 Thirty-seven of the CMM Recovery Projects are listed as carbon offset projects with the VCS and generate emissions reductions estimated to be 3.67 million mtco 2 e annually. 94 China China s central government has instituted strong GHG emission reduction incentives (i.e., by creating a floor price for domestic carbon offsets) as well as other incentives that promote CMM development (e.g., tax and feed-in tariffs), such as: GHG Emission Reduction Incentives. Sets a minimum price for domestic CERs of 8/CER. 95 Tax Incentives. Value-added tax refunds on gas sales; accelerated depreciation of CMM recovery and utilization equipment; tax credits of up to 40 percent for the purchase of domestic equipment; and deductions of up to 150 percent of the cost of research on new technology or processes. 96 Feed-In Tariffs and Utilization Incentives. The power grid must buy surplus CMM-generated electricity based on pricing for biomass-generated electricity, which is 0.25 Yuan/kWh over and above the regionally determined benchmark price of local desulfurization coal-fired units. 97 CMM used for industrial purposes (e.g., town gas, chemical feedstock) can be subsidized at 0.2 Yuan/cubic meter of methane Id.; See also 92 Id From the Notice on Accelerating CBM Drainage and Related Tax Regulations from Ministry of Finance and State Administration of Taxation, Cai Shui [2007] No From Views of Implementation on Utilization of CBM (CMM) to Power Generating from NDRC, Fa Gai Neng Yuan [2007] No From Views of Implementation of Subsidies for CBM (CMM) Development and Utilization from Ministry of Finance, Cai Jian [2007] No

17 Partly as a result of its strong incentive programs, in 2007, one-fifth of the world s CMM Recovery Projects were in China. 99 In addition, China is the world s leading CDM CMM project host, with its first CMM CERs issued in As of December 2010, 68 of the 70 CMM projects listed under the CDM are in China, although only 27 projects have been registered. 100 Each of the above programs has financial, regulatory, tax, and other elements similar to U.S. programs. The success of Germany s program utilizing feed-in tariffs is somewhat similar to state alternative and renewable energy program and warrants further analysis. However, centralized planning or large-scale national programs (such as in Australia and China) with cap-and-trade elements are not easily embraced by either the U.S. public or the business community and thus face major domestic political headwinds. Conclusion The U.S. public and private sectors are engaged in an ongoing joint effort to reach a national consensus on energy policy and programs to promote clean and renewable energy development and address the impact of GHG emissions (including CMM) on climate change. At the federal, regional, and state levels, a variety of regulatory and voluntary approaches and strategies are being implemented to increase CMM emission reduction efforts. Ultimately, regional and state GHG programs may establish the framework for a national energy and climate change policy and plan that is a unique U.S. blend of regulatory oversight as well financial, tax, and other incentives to facilitate CMM Recovery Project development. In 2010, important new legislative and regulatory measures were enacted that should accelerate CMM recovery operations. Among other things, the U.S. EPA s and California s new mandatory GHG emission reporting programs will gather CMM emissions data and information that will be available to mine operators, CMM Recovery Project developers, regulatory agencies, and other stakeholders for project feasibility analysis and planning purposes. Concurrently, meaningful federal new tax incentives in the 2010 Jobs Act and Tax Relief Act of 2010 provide accelerated expensing and depreciation tax benefits for the acquisition of equipment and other qualified property used in CMM Recovery Projects. At the same time, several major coal producing states have included CMM as an energy source in their alternative energy and renewable energy portfolio standards. Also, in an effort to attract clean energy businesses and create jobs, several states are providing grants, loans, and other incentives to facilitate CMM Recovery Project development. Finally, federal and state land management agencies are taking steps to grant royalty relief and other rights to facilitate the capture and use or destruction of CMM at operating mines. In many ways, the history of U.S. energy and environmental policy is repeating itself. Leading up to the 1980s, the country faced the prospect of rapidly declining natural gas supplies. In response to the challenge, Congress included in the Crude Oil Windfall Profit Tax Act of provisions for Section 29 Tax Credits 102 and federal research and development grants for the exploration and development of unconventional natural gas (such as coal gas). Ultimately, the program was remarkably successful, resulting in both the development of important new drilling and completion technologies and significant unconventional gas reserves and production, which are now a major contributor to the U.S. economy. A similar tax credit for CMM Recovery Projects would provide an essential incentive to accelerate the capture and use of CMM and the corresponding CMM emissions reductions. This approach, and other 99 IEA. CMM in China: A Budding Asset with the Potential to Bloom Id. 101 Pub. L. No (1981). 102 Greg A. Sanderson and Lesley W. Berggren, Update on Application of 29 Tax Credit to Coal Seam Gas (1998), available at, Section 29(a) of the Internal Revenue Code allowed a credit for qualified fuels sold by a taxpayer to an unrelated person during the tax year, the production of which is attributable to the taxpayer. The credit for the tax year is an amount equal to $3.00, as adjusted for inflation after 1979, multiplied by the barrel-of-oil equivalent of qualified fuels sold. After the 1997 inflation adjustment, the credit was approximately $1.05 per each 1.0 million Btu's produced. (pg. 1). 16

18 similar federal and state government policies and programs, could provide a win-win-win situation for mine operators, the economy (i.e., job creation), and the long-term protection of the environment. 17