US policy instruments to protect coal-bearing fragile lands

Resources Policy 25 (1999) 125–140 www.elsevier.com/locate/resourpol

US policy instruments to protect coal-bearing fragile lands William D. Watson

a,*

, King Lin b, Thomas Browne

c

a

c

School of Public Policy, Georgia Institute of Technology, 1927 Upper Lake Drive, Reston, VA 20191-3619, USA b ICF Inc., Room 470, 9300 Lee Highway, Fairfax, VA 22031-1207, USA Office of Surface Mining, South Interior Building, 1951 Constitution Ave., NW, Washington, DC 20240-0001, USA Received 10 December 1998; received in revised form 6 April 1999; accepted 5 May 1999

Abstract The Surface Mining Control and Reclamation Act (SMCRA) of 1977 established a regulatory framework to internalize environmental costs from coal mining, directed mainly at surface mining impacts. However, some sections of SMCRA also address environmental effects from underground mining. A particularly contentious issue has been whether subsidence or ground slumping caused by underground coal mining is prohibited in extensive areas protected by section 522(e) of SMCRA. This issue has never been settled at the Federal level due to successful legal challenges. In 1997, the US Department of the Interior reissued new draft rules. Important implications for impact, underlying economics, and policy choices stem from the fact that section 522(e) deals with protection both of public lands and private lands over underground coal. Policy instruments for efficient protection are quite different between the public and private lands. The proposed rules, analyzed herein, are only partly successful in implementing policies that address both public and private protections.  1999 Elsevier Science Ltd. All rights reserved. Keywords: Environmental regulation; Coase theorem; Cost-effectiveness; US coal industry

Introduction This paper examines the economic and environmental impacts that could occur if US Federal regulations on coal mining are changed to protect fragile lands against subsidence (i.e., surface slumping) caused by underground mining of coal. Due to recent legal challenges, the US Department of the Interior is evaluating a prohibition on underground mining in environmentally-fragile lands (herein called a “subsidence-prohibition” rule). A subsidence-prohibition rule would extend current prohibitions on surface coal mining in environmentallyfragile lands to include underground coal mining in those lands. The extension would broaden the protections set up by section 522(e) of the Federal Surface Mining Control and Reclamation Act (SMCRA). Section 522(e) of SMCRA prohibits surface coal mining in certain environmentally-fragile lands unless the coal owner can establish a “valid existing right” to the * Corresponding author. Tel.: +1-703-648-5260; fax: +1-703-6486419. E-mail address: [email protected] (W.D. Watson)

coal, mining operations were in existence in 1977 when SMCRA passed, or allowed waivers are granted. Environmentally-fragile areas protected by section 522(e) are Federal land preserves (i.e., national parks, national wildlife refuges, national trails, national wilderness areas, wild and scenic rivers, and national recreation areas), national forests, historic sites, and lands around public roads, private dwellings, various public structures, cemeteries, and public parks. Because net benefits of the rulemaking are sensitive to homeowner reactions, special attention is focused on this pivotal area. If section 522(e) were to be extended to include subsidence, underground coal mining would be prohibited in all protected areas enumerated in section 522(e) which includes the area occupied by dwellings and a 300 foot buffer around each home. The current prohibitions of section 522(e) for surface coal mining in dwelling buffers are not absolute. Under the provisions of section 522(e), coal owners (with mineral deeds) can negotiate protection/remediation with homeowners (who hold surface deeds), obtain a waiver from the homeowner, proceed with mine planning, and mine the coal if a permit is issued. Thus, obtaining a waiver is a procedure to by-pass the section 522(e) prohibitions on

0301-4207/99/$ - see front matter.  1999 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 0 7 ( 9 9 ) 0 0 0 1 6 - 1

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surface mining in dwelling buffers.1 Indeed, a considerable amount of surface coal mining or related activity is conducted inside dwelling buffers under waivers. But in the case of underground coal mining, homeowners currently do not have the protections of section 522(e) because the US Federal government has taken the position that subsidence does not fall under the purview of section 522(e).2 Mineral deeds held by coal owners ordinarily give them the legal right to carry out underground mining without the permission of surface owners. Surface owners have the protections of State and Federal regulations that require remediation and repair of damaged surface property, but they cannot block mining beneath their dwellings. If regulations were changed so that the prohibitions of section 522(e) apply to subsidence from underground mining, the waiver authority presently defined in section 522(e) would extend to underground mineable coal. Then, homeowners would be able to block access to underground mineable coal in dwelling buffers by withholding waivers, in effect, transferring the property right on the coal from the coal owner to the surface owner. The broad scope of section 522(e) mixes protections of public commons with protections of private lands. Section 522(e) sets out to protect environmentally-fragile lands in the public commons such as National Parks and National Wilderness Areas where, in principle, government intervention due to market failure may be justified. In addition, other provisions of section 522(e) provide protection for lands which are not environmentally-fragile in a public sense. These are extensive lands in road and housing buffered areas, mostly in private ownership. The role of government, in this case, is probably best confined to establishing a well-defined set of property rights and information access rights within which negotiation between self-interested parties can take place (Coase, 1960). As the paper explains, an outright prohibition of subsidence under section 522(e) most likely would be very inefficient, due in large part to section 522(e)’s wide embrace of both public and private interests. By focusing on the need to separate public and private objectives, the analysis is able to identify governmental policies that could be much more cost-effective than section 522(e) prohibitions in achieving the goals of SMCRA. Related analysis of oil field unitization (Libecap and Wiggins, 1985; Wiggins and Libecap, 1985) found that oil fields on western Federal lands were efficiently unitized early in their production life because the Federal government was able to overcome information problems. 1 Dwelling buffers are one of several section 522(e) areas with waiver authority. Waivers also can be given to carry out surface coal mining in national forests, historic sites, and road buffers. 2 If the current on-going rulemaking were to implement a subsidence-prohibition rule then it would reverse that position.

Bargaining among the various private lease holders went forward and production of oil was efficient. In contrast, policies implemented under state regulation in Texas and Oklahoma encouraged small operators to resist unitization and to over drill their lease holdings. These dissimilar outcomes illustrate both the power of bargaining by self-interested parties and the appropriate role of government in establishing ground rules. As this paper points out, these same principles are the basis of how the government can efficiently manage the competing private interest aspects of SMCRA. One approach given serious consideration by the Federal government is an outright prohibition of subsidence (and thereby underground coal mining) in all section 522(e) lands. Under a subsidence-prohibition rule, fewer hectares would be disturbed in the environmentally-fragile public commons areas and in private dwelling buffers (assuming homeowners withhold waivers). However, the costs of this additional protection could be high. As subsequent analysis shows, whether net benefits are positive or negative depends upon the numbers of households that choose to withhold waivers and block mining. If homeowner holdout rates are low, a subsidence-prohibition rule could be an economically efficient rule: the benefits from additional protection of fragile lands could be greater than costs. But when holdout rates are 10% or more, a subsidence-prohibition rule is likely to be inefficient. The government’s regulatory impact analysis (reviewed in this paper) considered alternate rules ranging from doing nothing to the opposite case of prohibiting subsidence in section 522(e) areas. This came about because the National Environmental Policy Act requires analysis of reasonable alternate rules. The two polar cases dominated intermediate rules (see Watson et al., 1996) and so the intermediate rules are not reported upon in this paper. In the previous rulemaking attempts, government officials as well as segments of the public considered the outright prohibition of subsidence as a rule of possibly high merit. The previous rulemaking attempts had also established an expectation on the part of the interested public that OSM would give serious consideration to a subsidence-prohibition rule. Thus, much attention in this paper is given to the analysis of the subsidence-prohibition rule, even though a main premise of the analysis is that such a rule ordinarily is not consistent with principles guiding the efficient protection of private interests. A subsidence-prohibition rule could be efficient if it supports all of the objectives required of the rulemaking. However, the analysis presented here shows that this is not the case. Analysis in the paper progresses toward separate policies that address protection of public assets versus protection of private assets. It is shown that this approach, rather than the all-or-nothing application of section 522(e) protections, would appear to yield an efficient and effective

W.D. Watson et al. / Resources Policy 25 (1999) 125–140

outcome. Nonetheless, because of the history of this particular rulemaking issue, it also is important to show why a subsidence-prohibition rule probably would not be an efficient or particularly effective policy. The next section compares estimates of areas at risk and hectares disturbed from underground coal mining under status quo against hectares disturbed under a subsidence-prohibition rule. Assessment provided in the third section shows that the extension of the 522(e) protections to underground mining could fragment coal reserves via homeowner holdout, shrink the eastern longwall coal mining industry, and raise national costs for mining and transporting coal by a large amount. There are three policy targets to be achieved by the rulemaking: environmental protection of fragile public lands, protection of homeowners, and maintenance of an efficient coal industry. The extension of section 522(e) prohibitions to underground mining is too blunt a policy instrument. As the discussion in the fourth section lays out, by using policy instruments specific to each of the policy targets, the Federal government can meet the three objectives in a cost-efficient manner. The last section summarizes the analysis and provides conclusions. The paper uses geographic information systems (GIS) to estimate coal-bearing hectares, tonnage, and market potential of private coal in environmentallyfragile lands. This GIS analysis provides data missing in earlier US Federal attempts to implement environmental policy to protect fragile areas from underground coal mining. The GIS analysis reveals that there is only a small amount of private coal in fragile Federal and State preserves that is profitable to develop. These estimates point to coal buyout as a policy instrument that could be cost-effective in the protection of environmentallyfragile public lands.

Areas affected Overview Tables 1 through 4 and Fig. 1 provide estimates for areas and associated coal tonnage for the lower 48 States and Alaska, potentially affected by SMCRA rulemaking on subsidence. The analysis presented in this paper considers all of the various areas listed in these tables. A summary of land-use estimates provides context for the analysis: Total US Land

929 million hectares (ha) (Fig. 1) 158 million ha (Fig. 1)

Total US Coal-Bearing Land Total 522(e) lands (public 190 million ha (Table 3, and private) column 2) Total 522(e) lands (public 166 million ha (Table 3,

127

only)

column 2, total excluding roads, dwellings, public structures, and cemeteries) Private Coal-Bearing Land 18 million ha (Table 3, in 522(e) Areas column 4) Underground-mineable, including hectares occupied by houses (Table 3, column 3) and buffers around houses as required by section 522(e) (explained below) Forecast of 522(e) areas 113 thous. ha (Table 4, with underground mining column 2) in the period 1995–2015 assuming subsidence is not prohibited by section 522(e) (status quo) Forecast of 522(e) areas 103 thous. ha (Table 4, with underground mining column 3) in the period 1995–2015 assuming subsidence is prohibited by section 522(e) (subsidenceprohibition rule) Most of the area at risk to subsidence damage (17.7 million ha, Table 3, column 4) is located in road and dwelling buffers (16.8 million ha, Table 3, column 4). The remaining at-risk area is located within the boundaries of Federal and State park lands (0.7 million ha, Table 3, column 4) and in areas occupied by public structures and cemeteries (0.2 million ha, Table 3, column 4). In the period 1995–2015, it is estimated that the most environmentally protective change in regulations (i.e., prohibiting subsidence in section 522(e) lands) would reduce the area undermined by 9,890 hectares (Table 4, column 4), representing about 2.5% of the total area forecast to be undermined in that 20-year period. About 5,627 fewer hectares (Table 4, column 4) would be undermined beneath road, structure, and dwelling buffers and about 4,263 fewer hectares (Table 4, column 4) would be undermined in Federal and State park lands. It should be noted that the estimate of at-risk hectares shown for houses in column 4 of Table 3 (10.96 million ha) is 365 times larger than the estimate of the private underground-mineable coal area occupied by houses as shown in column 3 of Table 3 (0.03 million ha). The 10.96 million hectare estimate includes buffered areas which would be pulled in by the extension of section 522(e) prohibitions to subsidence. This large areal increase is part of the reason why a subsidence-prohibition rule could have a devastating effect on longwall mining economics. The blow up in effected dwelling hectares is explained in more detail in the section below entitled “Other protected lands”.

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Table 1 Coal in federal land preserves, conterminous United Statesa (1) Federal Lands

Nat’l Park System Nat’l Recreation areas Wild and Scenic Rivers Nat’l Wilderness Areas Nat’l Wildlife Refuges Nat’l Trails System Nat’l Forest System Nat’l Historic Sites Total Total (excluding National Forests) Total (excluding National Forests and Historic sites) a

(2) Area (hectares)

(3) Area with coal (hectares)

(4) (5) Underground-mineable Underground-mineable privately-owned (million metric tons) (hectares)

(6) Underground-mineable privately-owned (million metric tons)

5,400,000 2,668,000 482,000

167,000 126,000 15,000

35,000 21,000 2,000

167 160 14

74.00 25.00 0.27

12,440,000 4,088,000 232,000 67,776,000 1,493,000 94,579,000 27,108,000

222,000 451,000 35,000 8,478,000 303,000 9,797,000 1,318,000

7,000 9,000 3,000 444,000 87,000 608,000 164,000

213 123 31 15,245 2,995 18,948 3,701

8.00 2.00 5.00 6,261.00 1,996.00 8,371.27 2,109.00

25,615,000

1,015,000

77,000

707

113.00

Data and methods are described in Watson and Tully (1998).

Table 2 Coal in Federal land preserves, Alaskaa (1) Federal Lands

(2) Area (hectares)

(3) Area with coal (hectares)

(4) Mineable coal (million metric tons)b

Nat’l Park System Nat’l Recreation Areas Wild and Scenic Rivers Nat’l Wildlife Refuges Nat’l Wilderness Areas Nat’l Forests Totalc Total (excluding National Forests)

21,696,000 424,000 289,000 35,486,000 24,102,000 9,447,000 67,053,000 57,606,000

245,000 0 800 807,000 363,000 0 1,052,000 1,052,000

1,994.00 0.00 0.18 460.00 1,270.00 0.00 2,454.00 2,454.00

a b c

A complete description of data and methods is provided in Watson and Tully (1998). Most of the coal is owned by the Federal government. Total is adjusted for overlap among categories.

Because the analysis is directed towards changes to SMCRA, it does not consider other fragile areas protected under other current laws. The Federal Land Policy and Management Act (FLPMA) provides additional significant protection of fragile lands, mainly managed by the Bureau of Land Management (BLM), Department of the Interior. The Federal government has retained coal mineral rights on about 4.4 million hectares in the western conterminous US. Through its planning process, BLM has set aside about 20% of these lands to protect various environmental and cultural assets (Watson, 1996). These lands do not fall under the purview of section 522(e) of SMCRA and are not affected by the SMCRA rulemaking analyzed in this paper. The next two sub-sections narrow the focus. The first sub-section concentrates on impacts that subsidence pro-

hibitions could have on Federal land preserves. The second sub-section looks at all other lands. The purpose is to identify the small suite of lands, out of a large total, that could be affected by the rulemaking. US Federal land preserves Fig. 1 provides a summary view of the overlap between coal-bearing lands and Federal land preserves. There is very little overlap. Areas with overlap (important for access to coal—see Fig. 1) include the Thunder Basin National Grasslands (under National Forest management) in the Powder River Basin of Wyoming, the Daniel Boone National Forest in Kentucky, and national forests in Colorado and Utah. Except for lands in the National Forest System and

W.D. Watson et al. / Resources Policy 25 (1999) 125–140

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Table 3 Coal occurrence on Section 522(e) lands, summary estimates (1) Section 522(e) landsa

(e)(1) (e)(2) (e)(2) (e)(3)

(e)(4)

(e)(5)

(e)(5) (e)(5)

Federal Landsb National Forests—East National Forests—West Historic Sites acres # of sites Roads acres rural miles Dwellings acres # of rural dwellings Public Structures and Cemeteries Public Parks Total

(2) Total area hectares

(3) Total coal-bearing hectares

(4) Private coal bearing area at risk to set aside under Section 522(e) underground-mineable hectares

(5) Private coal bearing area at risk to set aside under Section 522(e) surfacemineable hectares

83,221,000 10,148,000 67,081,000

2,068,000 1,192,000c 1,806,000c

77,000 342,000 87,000

40,000 98,000 12,000

1,493,000 25,713

303,000 4,730

87,000 2,237

29,000 794

22,701,000 3,092,631

2,552,000

5,824,000

1,842,000

340,000 24,476,635 340,000

30,000 2,190,591 30,000

10,963,000 1,888,962 222,000

1,816,000 871,375 41,000

4,499,000 189,823,000

246,000 8,226,000

141,000 17,744,000

50,000 3,928,000

a The modifiers—(e)(1), (e)(2), (e)(3), (e)(4), and (e)(5)—refer to subsections in section 522(e) of SMCRA. Each subsection indicates the area protected, whether protection includes a buffer, the size of the buffer, and whether waivers can be granted. b Sum for national parks, national recreation areas, wild and scenic rivers, national wilderness areas, national wildlife refuges, and national trails (from Tables 1 and 2). c These numbers are estimates of total coal-bearing area under the ownership of the Forest Service. The estimates of coal-bearing area in Table 1 are larger because those estimates include all coal-bearing hectares within the proclamation boundaries of national forests. A significant amount of the coal-bearing area (surface and mineral rights) within the proclamation boundaries is in private ownership and, therefore, not part of the national forests per se. The privately owned area will become part of the national forest lands when they are purchased by the Forest Service.

Table 4 Hectares forecast to be disturbed 1995–2015, underground mining (1)

(e)(1) (e)(2) (e)(2) (e)(3)

(e)(4) (e)(5)

(e)(5) (e)(5)

Federal Lands National Forests—East National Forests—West Historic Sites acres # of sites Roads Dwellings acres # of rural dwellings Public Structures and Cemeteries Public Parks Total

(2) Hectares disturbed under status quo

(3) Hectares disturbed subsidence prohibitions apply

(4) Change from status quo due to subsidence prohibitions

1,437 11,017 14,554

0 11,017 14,554

⫺1,437 0 0

511

511

0

18,234

17,500

⫺734

63,852 29,613 708 2,826 113,139

59,667 27,665 0 0 103,249

⫺4,185 ⫺1,948 ⫺708 ⫺2,826 ⫺9,890

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Fig. 1. Coal-bearing lands and federal land preserves. US area: 929 million hectares approx. Coal bearing area: 158 million hectares approx. Federal land preserves as shown: 160 million ha. approx.

lands managed by the Bureau of Land Management (Watson, 1996), it is unlikely that Federally-owned coalbearing portions in Federal lands, particularly in 522(e) lands, will be leased for coal mining. Thus, it is only privately-owned underground-mineable coal in section 522(e) Federal lands that is of interest for assessing coal impacted by section 522(e) protections. As an aggregate, the private underground-mineable coal in lower-48 Federal lands (enumerated by section 522(e)) is estimated to account for about 2% of total US coal reserves.3 The area with private underground-mineable coal accounts for about 0.6% of the 522(e) Federal land preserve area

3 Remaining coal reserves (Demonstrated Reserve Base) for the US are estimated to be about 430 billion tonnes (US Energy Information Administration, 1993). In recent analysis, Rohrbacher et al. (1993) adjust remaining coal resources to account for technical and regulatory limits on access to coal. These limits bring the estimate of remaining available coal resources down to about 1/2 of the coal originally reported in the Demonstrated Reserve Base. Against this lower base, the percentages reported in this section would be 2 times higher. The conclusion that private underground mineable coal in Federal land preserves represents a small percentage of total coal would still be a correct conclusion. For example, private underground mineable coal in section 522(e) Federal preserves outside National Forests is 0.5% of the total resources in the Demonstrated Reserve Base and 1% of the lower resource estimate extrapolated from Rohrbacher.

in the conterminous US. Approximately 75% of this coal is located within various national forests. US Federal coal located in western national forests, principally in Colorado and Utah, is leased by the Federal government to private mining companies for removal by underground methods. The Forest Service leases significant quantities of coal from its holdings in the Thunder Basin National Grasslands (in Wyoming) to private mining companies for removal by surface methods. There are considerable holdings of private underground-mineable coal in eastern national forests.4 Access to the coal is generally provided under compatibility findings issued by the Forest Service. In all of these cases, mining is allowed because section 522(e) prohibitions to mining can be waived when certain criteria are met. For example, section 522(e) allows surface coal mining on lands in the National Forest System west of the 100th meridian (see Fig. 1) that do not have significant forest cover when such mining is determined to be compatible with other uses of forest lands. The US Federal government uses this provision

4 Data on coal ownership in National Forests and National Grasslands were provided by the US Forest Service. Details on the estimates and sources are available in Watson et al. (1996).

W.D. Watson et al. / Resources Policy 25 (1999) 125–140

to lease Federal coal in the Thunder Basin National Grasslands in the Powder River Basin of eastern Wyoming.5 Section 522(e) also allows haul roads, mine entry shafts, and other surface operations incident to an underground coal mine to be located in National Forests when these facilities and their impacts are determined to be compatible with other uses of forest lands. The Federal government uses this waiver (of SMCRA’s general prohibition against surface activities and impacts incident to an underground mine) to lease coal in western and eastern National Forests for removal by underground methods. There would be very little change to coal mining in National Forests even assuming the Federal government extended section 522(e) so as to prohibit subsidence from underground coal mining. A prohibition on subsidence from underground mining in National Forests under section 522(e) would allow for a waiver of the prohibition when, as stated in section 522(e), underground mining is determined to be compatible with multiple use objectives specified in Federal law. Under current practices, the US Forest Service already considers subsidence impacts in determining compatibility of private mining operations in National Forests and, for the most part, does not limit mining due to subsidence impacts. In the case of National Forest lands, a subsidence-prohibition rule only has the effect of making subsidence a formal consideration in the determination of compatibility. Therefore, because the same criteria would be applied under prohibitions-apply as are now applied, it is anticipated that access in National Forests would be unaffected by a subsidence-prohibition rule. Consequently, a subsidence-prohibition rule would restrict access to coal-bearing areas only on Federal land preserves outside of National Forest lands. Exclusive of lands in the National Forest System, the area above privately-owned underground-mineable coal contained within Federal land preserves is estimated to be 164,000 hectares or 0.6% of the area of Federal land preserves (excluding National Forests) in the conterminous United States (Table 1, column 4). It is estimated that this area contains about 2.1 billion tonnes (metric ton) (Table 1, column 6) of privately-owned underground mineable coal or 0.5% of the US Demonstrated Reserve Base. The subsidence-prohibition rule would block access to this coal. But because the amount of coal is so small and because there are abundant low-cost reserves available elsewhere, in all likelihood such restrictions would have no perceptible effect on coal markets for the foreseeable future (analysis below).

5 Extraction of this coal in large-scale surface mines has made Wyoming the nation’s largest coal-producing state.

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Other protected lands Table 3 summarizes the estimates of total hectares, coal-bearing hectares, privately-owned undergroundmineable hectares, and (for comparison and completeness) privately-owned surface-mineable hectares, for US Federal land preserves and other areas protected under section 522(e). The estimates in columns 4 and 5 (for roads, dwellings, public structures, and cemeteries) include the area protected in buffers. In the case of dwellings for underground mining, this includes an outer ring (14.8 ha per dwelling) set aside from mining in order to keep subsidence impacts out of the 300foot (91.4 meter) protection buffer (3.1 ha per dwelling) around dwellings. As illustrated by Fig. 2, each protected house (assumed to occupy 1500 square feet or 0.014 ha) has a total area equal to 17.9 hectares within which underground-mineable coal cannot be mined. The outer ring is needed because the underground mining has to be stopped well short of the protected buffer to keep the upward-spreading cone of subsidence impacts out of the protected area. A typical longwall coal bed such as the Pittsburgh bed in southwest Pennsylvania is 800 feet (243.8 meters) below the surface. Assuming subsidence forces spread at an angle of 30 degrees, an additional ring, 460 feet (140.2 meters) in width, has to be added to keep the subsidence impacts outside the 300 foot buffer around a dwelling. Protected dwelling buffers overlap with other dwelling buffers, road buffers, and public building buffers. GIS analysis was applied in specific counties against a known geographically-located inventory of houses, roads, and public buildings to develop an estimate of impacted area adjusted for overlap (Bryant et al., 1995). On average, prohibiting subsidence in the 300 foot buffer around dwellings would set aside the coal in 5.8 hectares per protected dwelling. It should be noted that the 5.8 hectare estimate is consistent with the dwelling hectares and no. of dwellings shown in column 4 of Table 3; 10.963 million hectares divided by 1.889 million dwellings gives 5.8 hectares per dwelling. The set-aside area of 5.8 hectares is more than 414 times the area occupied by a 1500 sq. ft. house. The Pittsburgh coal bed which extends over southwest Pennsylvania, northern West Virginia, and eastern portions of Ohio is mined extensively by longwall methods and is the second highest produced coal bed in the US after the Wyodak–Anderson coal bed in Wyoming. In the case of the Pittsburgh bed, a housing buffer of 5.8 hectares would sterilize about 145,000 tonnes of coal. This relatively large set-aside of area per house lends support to the idea that a relatively small number of homeowners (choosing to withhold waivers) could fragment coal to the point where contiguous coal blocks required by longwall mining are too small for profitable operations. Some dwellings areas have both surface- and undergroundmineable coal. Hence, the combined count of dwellings

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Fig. 2.

Areas set aside to protect dwelling buffers.

with underground coal (col. 4, Table 3) and surface coal (col. 5) purposely exceeds total rural dwellings (col. 3).6 Historically, access to coal at (e)(3) Historic Sites has been achieved through waivers, as provided under section 522(e). It is anticipated that this practice will continue in the future. Therefore, the subsidence-prohibition rule being considered by the US Office of Surface Mining in all likelihood would not have any impact on coal mining at historic sites. The conclusion to be drawn from this brief review is that the subsidence-prohibition rule would affect access to coal primarily in various Federal land preserves (except National Forests and National Historic Sites), road buffers, dwelling buffers, public structures, cemeteries, and public parks. It is important to note that the set-aside estimates for roads, dwellings, private structures, cemeteries, and public parks are for rural locations only since underground coal mining does not occur below highly developed urban surface owing to liability risk and high remediation cost. Hectares forecast to be disturbed, 1995–2015, underground mining Aside from the rulemaking itself, this analysis distinguishes among three factors affecting the amount of area undermined in the future. The first factor is length of time. This paper estimates undermined or disturbed area 6 Details of the methods and data are provided in Watson et al. (1996).

over the 20-year time period, 1995–2015. A 20-year time period represents the limit on the ability to make reasonable estimates of coal mining activity and disturbed lands. Existing infrastructure, in the form of coal mines, transport systems, and electric generating plants will dominate the pattern for the next 10 to 20 years. Thus, the analysis can rely upon trend projections for the next 20-year period, 1995–2015. After that, changes in technology, new regulations, higher or lower oil and natural gas prices, changes in energy use intensity, and other unknown factors most likely will create new trends which cannot be reliably forecast. The second factor is “background filters”. Currently, access to 522(e) lands can be achieved through existing waiver and compatibility provisions in section 522(e). These preconditions can have important effects on access. As indicated above, future access to coal in National Forests, National Grasslands, and Historic Sites probably will be granted according to current procedures, independent of any alternate rules. The third factor is market potential. Coal mining takes place when coal has a market. Within the 20-year time period, only the “best” coal will be mined. The area forecast to be disturbed will be a small fraction of potentially disturbed lands and will be located on those 522(e) lands that have marketable coal deposits. To obtain estimates of mined or disturbed hectares, market factors were applied to the coal-bearing area on a county basis. Market factors are an estimate of the fraction of reserves by county that have been produced in the 10-year period 1985 through 1994. These initial market factors were

W.D. Watson et al. / Resources Policy 25 (1999) 125–140

133

Fig. 3. Remaining coal in the Pittsburgh Seam and buffered dwellings in Greene County, Pennsylvania. Typical longwall mine: annual production of 1.815 million tonnes for 20 years. Areal extent of an average longwall mine: 4.5 km×4.5 km (Bryant et al., 1995).

doubled to provide an estimate of the fraction of coal reserves by county that is likely to be produced in the 20 year period 1995–2015. The factors are doubled because the target period 1995–2015 is twice as long as the base 10-year period used in estimating the market factors. These doubled factors and an additional upward adjustment to account for mining recovery rates were applied to privately owned coal lands in 522(e) areas (on a county basis) to estimate the area forecast to be disturbed by production of marketable coal in the period 1995–2015.7 This analysis indicates that there has been very little historic production of coal in the relatively few counties that overlap with Federal and State preserves (aside from National Forests and Historic Sites). The application of market factors forecasts insignificant production over the next 20 years (about 0.5% of total coal production).8 Because the US has a large and spatially diverse coal endowment, it is concluded that if such coal could not be mined (or if it were to be bought out to prevent its mining), only a small cost would be involved. Estimated buyout costs, presented later, support this conclusion. Under a subsidence-prohibition rule, analysis indicates that withholding of dwelling waivers has the potential to significantly alter coal mining operations (Fig. 3). GIS analysis was applied to six US counties where long7

Estimates of market factors can be found in Watson et al. (1996), Appendix C. 8 Coal bearing area for Federal and State land preserves has been estimated on a county basis, but then totaled for the entire nation.

wall mining operations are concentrated.9 The GIS results indicate that if 10% or more of homeowners withheld waivers coal reserves would be so fragmented that longwall mining operations would no longer be economically viable.10 However, the impact would not be immediate. Existing longwall mines would be able to continue operations from existing reserves under the “existing operations” and “needed for and adjacent to” provisions in SMCRA and, thereby, would not be affected by new rules. All new mines would be subject to homeowner waiver authority. Other types of underground mines (conventional room-and-pillar mines and room-and-pillar mines with retreat which are not as sensitive to fragmentation) would be able to continue economic operations even with fragmented reserves. Over time, any new potential longwall mines would be displaced by other local mines or by coal mines located in other regions, namely Central Appalachia and the West. Road and dwelling densities are lower in Central Appalachia and especially the West than in the regions that could lose coal production. The lower densities would result in less area being undermined. In addition, new underground mines in all locations could have holdout dwell-

9 The six counties are Greene and Washington counties in Pennsylvania, Marshall and Monongalia counties in West Virginia, and Franklin and Saline counties in Illinois. Fig. 3 shows Greene county only. 10 See Watson et al. (1996) for a discussion of the methods used to determine the threshold holdout rate.

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ings, and the area around these dwellings would not be undermined. Analysis of the location of coal production and impact was carried out at the county level. Estimates were developed for road, dwelling, and 522(e)(5) (public structures and cemeteries) densities at the county level. These densities were applied to areal extent of mining by county to obtain estimates of road, housing, public structure, and cemetery hectares undermined. Estimates were then aggregated for the nation. Table 4 provides estimates of the area of SMCRA 522(e) lands at risk and forecast to be disturbed by underground mining under a subsidence-prohibition rule. The effect that a prohibition-apply rule could have on access to underground-mineable coal area in 522(e) lands is provided in the following results: —Under status quo, it is projected that 113,139 hectares in 522(e) areas (Table 4, column 2) would be disturbed by underground coal mining in the period 1995–2015. This 522(e) disturbed land is about 30% of the total area projected to be disturbed by underground coal mining throughout the United States in the period 1995–2015. —Dwellings, roads, and their associated buffers account for most of the disturbance: 82,086 hectares or 73% of total 522(e) hectares projected to be disturbed. —The subsidence-prohibition rule is projected to reduce the disturbed area in 522(e) lands by 9,890 hectares (Table 4, column 4) in the period 1995–2015. This is a reduction of about 7% in the area disturbed in section 522(e) lands under status quo. The 9,890 hectares contain about 200 million tonnes of coal, which is about 1% of total coal projected to be mined in the United States in the period 1995–2015.

Economic costs and benefits Economic costs On the cost side, a subsidence-prohibition rule could shut down the eastern longwall mining industry if 10% or more of homeowners withheld waivers. The coal market would adjust by turning to the next best, but more costly, coal reserves. The following forecasting and analytic steps were applied to estimate the related economic costs: (1) a base case forecast (i.e., one consistent with the status quo) of coal production was made at the county level using historic data, Energy Information Administration regional forecasts to the year 2010 (US Energy Information Administration, 1994), and trend extrapolation beyond 2010 to 2015, (2) future production from existing eastern longwall mines was forecast based

upon coal reserve data and recent production (by mine) provided by the US Energy Information Administration (1995), (3) the difference between forecast total longwall production and longwall production from existing eastern mines (tapered down as planned extraction is completed) was assigned to new mines, (4) replacement coal production in new mines was phased-in at new locations based upon regional mining cost differences, coal transportation costs, and coal-consumer locations, (5) the extra cost of producing and delivering coal with and without the subsidence-prohibition rule was calculated, and (6) the savings in dwelling and road repair costs were calculated under the prohibitions apply rule consistent with the decrease in hectares undermined beneath dwellings and roads.11 As explained above, there would be no impact on coal access for the mines operating or permitted in 522(e) lands at the time rules are published to implement the subsidence-prohibition rule considered herein. Over time, blocked-up reserves would be depleted and less coal would be produced in existing (unaffected) mines and more would be shifted to new mines that are subject to the subsidence-prohibition rule. Coal production from existing longwall mines is projected to decline to 48 million tonnes by 2015, only one-third of the tonnage mined in 1995. Under a subsidence-prohibition rule, 10% of the rural dwelling owners are assumed not to grant waivers for mining. Any shortfall in coal production projected for longwall mining under the status quo case would be replaced by production from room-and-pillar or surface mines in the same mining region or by coal production from mines outside of the region. It is projected that the US Western region (principally the Powder River Basin in Wyoming) will gain approximately 46 million tonnes of surface production by 2015 due to the loss of longwall production in the Eastern and Interior coal basins. Production in central Appalachia is expected to increase 23 million tonnes by 2015 due to longwall production losses. Coal from new regions would be delivered at an additional cost equal to the differential between “old” longwall costs and local room-and-pillar costs.12 By

11 The estimates of additional coal mining costs are consistent with market principles for an exhaustible resource (Nordhaus, 1979; Modiano and Shapiro, 1980; Daniel and Goldberg, 1981; Bohi and Toman, 1984; Rowse, 1986). 12 Shipments from other regions would have costs less than the costs of local room-and-pillar operations. The slight cost advantage is required by market competition, otherwise coal from other regions would not be able to capture a larger share of the local market. Rather than try to fine-tune estimates of costs to account for the slightly lower costs of the additional coal from other regions, the local cost differential is used as an estimate of the increased cost when longwall mining is made uneconomic under the subsidence-prohibition rule. This procedure tends to provide an estimate of total additional coal-mining and

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region, these differential costs are estimated to be (Hill and Assoc., Inc., 1994): Northern Appalachia: Central Appalachia: Southern Appalachia: Interior:

$6.50/tonne $5.22/tonne $5.07/tonne $1.86/tonne

By region, the replacement coal tonnage is multiplied by differential costs. These cost differentials are the “umbrella” under which other more costly coal penetrates the markets to replace prohibited low cost longwall coal. Detailed, with-and-without analysis of regional markets determined the mix of replacement coal. This includes additional coal from surface and underground mines in eastern coal fields, and additional surface-mined coal shipped over longer distances from the Powder River Basin in Wyoming. The projected annual additional costs to the economy under the subsidence-prohibition rule are shown in Fig. 4. These annual costs are discounted at 7% to obtain an estimate of $2.65 billion in additional coal-mining and coal-transportation costs (present value) for the period 1995–2015. Fewer dwellings and roads are undermined when a subsidence-prohibition rule is in place. In present value, savings in dwelling repair costs are $8.0 million and saving in road repair costs are $7.2 million (1995–2015 at 7%).13 There is very little information to indicate how homeowners might behave under a subsidence-prohibition rule. Therefore, in the absence of solid information to the contrary, equal probabilities are applied to each

Fig. 4. Additional coal-mining and coal-delivery costs, subsidenceprohibition rule vs. status quo. Assumes 10% of homeowners withhold waivers.

coal-delivery costs that are slightly more than what the actual cost might be. 13 Rulemaking has the potential to increase real economic costs by imposing significant transition costs for retraining and relocating displaced workers. But, because longwall mining is phased-out over a period of 15–20 years under the subsidence-prohibition rule, the rule has very low potential for generating real costs to the economy through such transition costs (Watson et al., 1996).

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holdout rate considered. Based upon experience in Pennsylvania where certain homes had waiver protection until recently, it is assumed that 50% is at the upper end of the range of plausible holdout rates. Fig. 5 is the basis for assessing the effect on costs of uncertain household responses. It shows, for example, that if 8% or fewer of homeowners withhold waivers under a subsidence-prohibition rule, the savings (negative costs) to the economy will range from $0 (at 0% holdout) up to about $7.7 million (discounted) at 8% holdout. Above a 10% holdout rate, new eastern longwall mines would be uneconomic and the economy would have to absorb the extra costs of switching over to other more costly mining methods and to more distant western coal.14 The cost curve in Fig. 5 can be regarded as a tradeoff curve for decision-making purposes. It is assumed that there is an equal probability for every homeowner waiver withholding rate. Thus, cost savings on the order of $7.7 million at low holdout rates receive a weight of 0.2, and costs of $2.65 billion at holdout rates above 10% would receive a weight of 0.8. Thus, expected costs would be about $2.1 billion (discounted). While the actual outcome is uncertain, the analysis supports the conclusion that a subsidence-prohibition rule would expose the economy to a high risk of large economic costs.

Fig. 5. quo.

Costs to the economy, subsidence-prohibition rule vs. status

14 At holdout rates above 10%, it is quite likely that mining costs in replacement room-and-pillar mines would begin to increase as a result of fragmented access occurring with holdouts. These impacts have not been taken into account. Instead, the estimate of additional coal-mining and coal-delivery costs at the 10% holdout level ($2.65 billion discounted) has been used as the estimate for all higher holdout rates. Actual costs at the higher holdout rates are likely to be a lot higher.

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Benefits and costs of a subsidence-prohibition rule Table 5 summarizes costs and benefits of the subsidence-prohibition rule. In the next 20 years, coal mining is estimated to disturb only a small amount of area in US Federal and State land preserves. By extending the prohibitions of section 522(e) to underground mining, in the next 20 years Federal rulemaking could reduce underground mining and associated subsidence impacts in Federal environmentally-fragile lands (e(1) lands) and in State parks by about 4,263 hectares (Table 5). In addition, disturbed area associated with roads, dwellings, public structures, and cemeteries would be reduced by about 5,627 hectares (Table 5). The added area protected in dwelling and road buffers assumes that 10% of homeowners with coal targeted for underground mining would block the mining by not signing waivers. The 10% withholding rate also is applied to relocated mining. Table 5 shows that the costs of achieving this protection via section 522(e) appear to be very high compared to benefits. Prohibiting subsidence under section 522(e) would pose a high risk of shutting down the eastern longwall coal mining industry, the most technologically advanced and fastest growing segment of the underground coal industry.

Policy instruments Rulemaking on subsidence brings three distinct objectives into play: the protection of environmentally-fragile lands in US Federal and State preserves; the protection of homeowner sites; and the maintenance of a profitable and technologically-advanced coal industry. The overall policy objective should be to achieve a balanced approach to each objective by identifying and applying policy instruments that are themselves the lowest cost (or cost-effective) methods to address the separate objectives. Under many circumstances, this ordinarily requires that the regulatory body use the same number of policy instruments as policy targets. The doubling-up of policy Table 5 Costs and benefits 1995–2015 subsidence prohibitionsa Category

Impact

Additional coal mining and distribution costs (discounted) Benefits Smaller area under-mined All land categories of which Federal lands and public parks equal and Private lands equal

$2.65 billion

a

9,890 hectares 4,263 hectares 5,627 hectares

Additional costs and benefits, compared to status quo.

instruments or the application of a single policy instrument to several objectives can result in a second-best approach with high inefficiency. The most serious limitation of section 522(e) is that it locks public and private objectives together in a way that provides no flexibility to apply separate strategies appropriate to the disparate public and private objectives. Given the unique environmental attributes of Federal and State park lands, such as the New River Gorge, Cumberland Gap National Park and other comparable areas (see below) that could be adversely affected by underground mining, there is a strong case—in view of the small opportunity costs for protection versus large benefits (i.e., avoided damages to unique environments)— that these areas should be protected from subsidence. These unique environments are public goods that warrant protection on a benefit–cost basis. But other areas protected under section 522(e), such as roads, dwellings, and associated buffers are private assets. Here, Coasiantype negotiation between self-interested parties probably can be relied upon for a balanced and efficient-in-thelarge outcome. Government intervention, except possibly to clarify property rights and correct any capital or information asymmetries, is not warranted. Coal mining is an industry that has a rich and instructive history of negotiation between self-interested parties as an efficient way to internalize costs. Section 522(e) of SMCRA prohibits surface mining inside a 300 foot buffer around private dwellings. State programs implemented under SMCRA contain sections similar to, if not identical to, section 522(e) in SMCRA. Many mineral deeds were severed from surface deeds early in the 20th century when surface mining was not an established mining method. Thus, very few mineral deeds give legal authority to a mineral owner to carry out surface mining. Nonetheless, since 1977, there has been considerable surface mining occurring around rural dwellings. Mining companies and homeowners have negotiated compensation for damage and inconvenience, and the mining has proceeded when homeowners have waived the prohibition, as allowed under the section 522(e) provisions of the State programs. A waiver is practically the only route by which mineral owners who want to conduct surface mining can gain access to coal in protected housing buffers. The other route allowed by SMCRA—possession of a valid existing right—rarely occurs because severed mineral deeds almost never carry the authority for surface mining, a necessary condition to establish a valid existing right. State mining permit programs keep statistics on the occurrence of section 522(e) conflicts and their resolution. In a random sample of 600 permits designed to have high reliability for representing the population of all permits, it was found in the period from 1987 to 1995, that 88% of dwelling-buffer area was permitted under waivers and the balance under VER (Watson et al., 1996, chapter III and Appendix C). Anec-

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dotal history also indicates that mining companies and homeowners are not shy about negotiation. There are cases, of course, when waivers are not signed. In such cases, it can be presumed that the compensation offered by coal mining companies (reflecting their cost savings) are not large enough to cover losses to homeowners, resulting in an efficient outcome. Fischel (1995) describes a second successful example of self-interested negotiation leading to an efficient outcome, in this case, involving underground coal mining subsidence in the anthracite fields of Pennsylvania. Scranton Pennsylvania was at the heart of the anthracite coal field in the early part of the 20th century. One rather disreputable coal company was illegally mining support pillars of coal beneath schools and roads in Scranton. In 1921, this led the Pennsylvania legislature to pass the Kohler Act that prohibited mining of anthracite causing subsidence of structures. This law was struck down by the Supreme Court in 1922 partly on the grounds that the Kohler Act constituted an illegal takings. Fischel reviewed the history of what happened to residential property in the Anthracite Fields after the Kohler Act was repealed. What he found was a history of Coasian negotiation between mining companies, property owners, and local governments that balanced competing interests. In general, the coal mining companies found it in their interest to fill abandoned mines with waste materials, to avoid mining below expensive surface property, and to mine beneath dwellings only after they negotiated repair and compensation with surface owners. The anthracite industry continued for another 25 years, until it faded after World War II. Records of the State mine inspection agency indicate a decline in mine subsidence as an issue over this period. Fischel also points out that the Kohler Act and publicity of the time led to the formation of certain homeowner protection associations which were instrumental in negotiating improved practices by the mining companies. The history of subsidence in the anthracite fields and more recent experience in the case of surface mining support the case for minimal government intervention. Negotiation between self-interested parties would appear to be a practical method to efficiently internalize costs from subsidence when costs and benefits accrue to private parties. Protection of homeowner sites Section 516 of SMCRA deals explicitly with subsidence mitigation and compensation. In order to implement SMCRA at the State level, various States adopted their own regulatory programs including provisions to enforce the requirements of section 516. Thus, aside from section 522(e), SMCRA implementation has provided for significant regulation of subsidence from underground coal mining and for the protection of dwellings. Most

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importantly, this regulation was greatly strengthened by the Energy Policy Act of 1992. Prior to the passage of the Energy Policy Act, surface property owners had the burden of proving subsidence damage in order to force remediation or compensation from coal owners. The Energy Policy Act and recent parallel legislation at the State level have shifted responsibility for remediation and compensation to the coal owner. Consequently, remediation and compensation now are required almost automatically at levels slanted toward the interests of surface owners. But the new laws are just now being implemented. And even though the major objective of the new laws is to guarantee an outcome where homeowners will be made whole, there is some controversy about whether implementation is adequate to achieve this goal. Nonetheless, there now exists a mechanism or framework set up to specifically address protection for homeowners facing the risk of subsidence damage. This route appears to be an effective policy tool for achieving homeowner protection. The Energy Policy Act essentially establishes the framework for Coasian negotiation. The contribution of the Act is to clarify responsibilities and to provide for a more complete exchange of information. Given the history of successful negotiation between mineral owners and homeowners recounted above, there is high likelihood that negotiation facilitated by the Energy Policy Act will prove to be an efficient way to sort out the competing private interests of mining companies and homeowners with respect to subsidence. Protection of environmentally-fragile lands in US Federal and State preserves As the outcome of this rulemaking, the US Department of the Interior is proposing not to prohibit subsidence in section 522(e) areas (62, Federal Register, 4864, Jan. 31, 1997). If the proposed rule is adopted as seems likely, there are some areas in US Federal and State land preserves that would be undermined and damaged by subsidence. This will occur when mining companies, who own the rights to the coal and have mining operations located outside the boundaries of Federal and State preserves, extend their operations under the surface of the Federal and State lands. Mine portals, haul roads, and other surface activities will not be located on the Federal and State lands because these operations are already prohibited by section 522(e). However, as it stands, SMCRA does not prevent mining companies from accessing the coal through an underground route. As was the case with homeowner protection, a costeffective approach for dealing with this risk to the environment is to fashion a policy instrument targeted on the specific problem. A cost-effective instrument is a commitment by Federal and State agencies to purchase this coal.

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Some of the East’s most unique environmental areas could be undermined if the coal is not bought-out. This includes areas within the New River Gorge National Park, Cumberland Gap National Park, Gauley River National Recreation Area, Big South Fork National Recreation Area, Obed Wild and Scenic River, the North Country Scenic Trail, and several unique national wilderness areas such as Beaver Creek in Kentucky and Otter Creek in West Virginia. State parks with comparable unique environmental features are slated to be undermined. The cost to purchase the coal beneath environmentally-fragile areas at risk in the period 1995–2015 is about $75 million (1995$, discounted). The cost for the US Federal lands is about $25 million; for State park lands it is about $50 million (Table 6). This cost represents the value of undeveloped coal or coal in the ground. Outside the longwall areas, the combination of up-front royalty and production royalty on Eastern underground-mineable coal is at most about $1.65 per tonne. Assuming a coal bed thickness of 3 feet, the cost per acre is about $8,000 (or $19,800 per ha.) at the high end. A plausible range on cost is from $2,000 to $8,000 per acre. From an efficiency perspective, the coal should be purchased and the area set-aside from coal mining if the stream of environmental benefits (achieved through the set-aside) exceeds the purchase price. Because the lands include some of the nation’s most unique Eastern natural settings, there is a high likelihood of a positive net benefit from preservation. Unfortunately, at this point in time, neither the US Federal government nor State governments have buyout programs. The anticipated rulemaking on section 522(e) will leave fragile lands exposed to damage unless buyout programs are instituted. Discussion Results outlined in this paper were presented to top management at the Office of Surface Mining. These Table 6 Costs for purchasing private coal in fragile areas protected under section 522(e) SMCRA, with potential to be produced in the 20-year period, 1995–2015 (thousand 1995$, discounted at 7%)a Protected Area National Parks National Recreation Areas Wild and Scenic Rivers National Wilderness Areas National Wildlife Refuges National Trails Total Federal State Parks Total Federal and State a

Cost $12,527 $8,072 $118 $1,727 $– $3,335 $25,779 $50,689 $76,468

See Watson et al. (1996) for analytic details.

results and other information provided the basis for making a tentative decision not to prohibit subsidence under section 522(e) of SMCRA. The analysis involved a relatively large expenditure of agency resources. The analysis started in late 1994, involved about 12 man-years of effort, and a cost of about $1,500,000. Much of the effort was given over to record keeping, public hearings, and preparation of responses to comments provided by individuals, public agencies, industry, and environmental organizations. The rulemaking process and related activities are expected to end in late-1999 when a final rule is published. The analysis was able to identify a 10% holdout rate as the technical threshold rate at which new eastern longwall mines would be uneconomic. But there was no analysis of what actual holdout rates might, in fact, turn out to be under a subsidence-prohibition rule. Analytic staff made the judgment that it would be extremely difficult and costly to run surveys to determine prospective holdout rates and that the results could be extremely unreliable due to the inability to control gaming and other strategic behavior by survey respondents. On the other hand, the analysis provided a fairly complete and data-rich description of impacts to the environment and impacts to coal markets when coal in Federal and State land preserves is set aside. OSM management regarded the information and analysis as a strong support for the tentative decisions that have been made. Often it is presumed that regulatory agencies will be proactive, preferring active intervention over status quo. The current rulemaking serves as a counter example. The substantial risk for large economic costs, revealed by the analysis, led management to a careful weighing of consequences and to the tentative choice of status quo as the preferred policy. The Federal decision makers also realized that there could be a large risk of a successful takings challenge by owners of longwall-mineable coal if a subsidence-prohibition rule were to be chosen. The compensable value on the coal would be the discounted value of future cost savings from developing the coal (estimated herein at $2.65 billion). These cost savings, or dynamic Ricardian rents, represent the value of the coal, in an undeveloped state, over the next best alternative coal (Hartwick, 1982; Levhari and Liviatan, 1977; Rowse and Copithorne, 1982). Consequently, by sticking with the status quo, the Department of the Interior avoided exposure to potential takings compensation claims of several billion $.

Conclusions When the Surface Mining Control and Reclamation Act was passed in 1977, prohibiting underground mining under section 522(e) was a reasonable means to secure environmental protection for homeowners and for

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environmentally-valuable natural commons. But in the 20+ years since 1977, the US coal industry has undergone significant realignment, including rapid technological innovation both for surface and underground extraction. In particular, longwall mining of underground coal has grown rapidly due to its ability to scale up operations faster than costs. This dynamic improvement in productivity has made it the lowest cost underground mining method. Simultaneously, the improvement and application of longwall mining technology has added new constraints on policy for protecting the environment. To achieve low costs, the longwall technology is applied to relatively large blocks of contiguous coal. Policies that would have the effect of restricting access to contiguous blocks of coal by making coal around dwellings inaccessible would eradicate the scale economies necessary to the economic survival of eastern longwall mining. Rigidity of the longwall mining technology is accompanied by rigidity in SMCRA. Section 522(e) cannot be applied selectively. The extension of the prohibitions of section 522(e) to include subsidence would prohibit underground mining in fragile US Federal and State lands and in buffers around dwellings. But unfortunately the latter prohibitions would give rise to fragmented coal availability, most likely to the point where eastern longwall mining no longer would be economic. A cost-effective approach to rule making could be achieved if the US Department of the Interior applied individual policy instruments to each of three policy targets. The analysis presented here indicates that the viability of the longwall mining industry can be secured by sticking with the status quo and not extending section 522(e) prohibitions to underground mining. It appears that the US Department of the Interior will opt for this policy as the final resolution of its current rulemaking activity. A second policy target—protection of private dwellings—can be efficiently secured by enforcing the homeowner compensation provisions of the Energy Policy Act. The Energy Policy Act provides a framework under which mining companies are required, in principle, to fully compensate homeowners for all costs and losses on their dwellings due to subsidence. Effective implementation of these protections would internalize costs and push in the direction of an economically efficient outcome. Because this objective involves the resolution of competing private interests, the role of government is best confined to clarifying property rights and correcting asymmetries in access to capital and information. These are the conditions required for successful Coasian-type negotiation. The logical foundations of the Coase theory and the recent history of the coal mining industry point to Coasian negotiation as an efficient method to internalize subsidence costs when competing private interests are at stake. The third policy target—protection of fragile US Fed-

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eral and State lands from subsidence—is not addressed by current policy or by the anticipated outcome of current rulemaking. Estimates of the amount of privatelyowned coal with market potential in fragile US Federal and State preserves is the key bit of information needed to determine an effective policy instrument. The estimates provided herein indicate that the private holdings of coal are small, they have limited market potential, and they could be bought out at a low cost. Thus, the US Department of the Interior and State agencies should add coal buyout as an additional instrument to achieve the environmental protection goals set forth by SMCRA.

Acknowledgements The authors are grateful to the editor and referee for their insightful comments and suggestions. The views expressed are those of the authors and do not necessarily reflect those of their respective institutions.

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