Authors

Ryan M. Yonk, Ph.D
Josh T. Smith
Arthur R. Wardle

 STRATA WORKING PAPER

Recent bankruptcies in the coal industry have stoked concerns regarding the efficacy of the Surface Mining Control and Reclamation Act of 1977 (SMCRA). We review the history of SMCRA through a public choice lens focusing on bonding and the Abandoned Mine Land fund (AML). Overall, SMCRA can be considered a success, but important problems persist that demand attention. For example, bond valuation is improperly handled and the AML is used for political purposes by state governments. We propose these problems could be mitigated with binding guidelines for bond release and by putting valuation in the hands of independent third parties.

JEL Codes: Q38, Q48, K20, K32,
Released: May 1, 2017
Last Major Revisions: January 8, 2017

 Executive Summary:

Recent bankruptcies in the coal industry have stoked concerns, especially among environmental groups, regarding the efficacy of the bonding portions of the Surface Mining Control and Reclamation Act of 1977 (SMCRA). These concerns have focused primarily on the adequacy of self bonding to cover reclamation of lands disturbed by mine activity. In this report, we review and synthesize the history of SMCRA’s implementation and enforcement using a public choice lens and focus our evaluation predominantly on the bonding requirements and Abandoned Mine Land fund (AML) portions of the act.

SMCRA and the coal industry’s compliance with reclamation requirements should be considered a success, but there remain several issues persisting in the regulations and approach that ought to be addressed to improve the efficacy and efficiency. For all bonds, release is postponed far too long due to regulators’ precautionary proclivities, while at the same time bond valuation is generally set too low by government regulators. As both problems ultimately stem from incentives facing state governments, they could be largely solved with binding guidelines for bond release and by putting valuation in the hands of independent third parties. Notably, while we agree that self bonds lack the complete legal surety of other bonding mechanism’s guarantees, we do not find substantive evidence that the current self bonding regime leaves mines at risk of being left unreclaimed in bankruptcy proceedings. Those proceedings and the requests from coal companies in the process have generally left reclamation liabilities untouched in form and substance. We suggest slight modifications to the AML allowing large surpluses in that fund to cover whatever small risk exists among self bonded mines (operating, in a sense, as a trust to guarantee reclamation activities). We estimate that the AML is adequate to cover that risk.

By reforming bond release, bond valuation, and allowing AML funds to cover self bonded bankruptcies as a last resort, SMCRA can alleviate contemporary concerns over the adequacy of reclamation bonding, continuing to protect the environment without violating its explicit mandate to avoid unduly hampering the coal industry’s continued production.

Our examination of the AML found that the fund is regularly misused to pay for programs and line items other than its statutorily authorized reclamation projects. This misuse has included payments to mine worker union funds to guarantee pensions and health care to retired mine workers, and even completely unrelated public projects that states view as a priority but are clearly outside the scope of the AML. These uses divert some funds and while problematic these diversions do not currently jeopardize more than a relatively small share of the fund. Unfortunately attempts to redirect increasing amounts AML funds are ongoing and have repeatedly been introduced in the 115th congressional session. We suggest greater vigilance in ensuring that AML funds are only approved for reclamation-related uses.

Taken together our evaluation of both self bonding and the AML fun leads us to conclude; first that the current regulatory regime and industry’s compliance with those regulations, including self bonding has provided well for reclamation of operating coal mines, and second that relatively small tweaks both in the bonding process and in the scope of the AML could improve the efficacy and efficiency of the reclamation process.