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As Fossil Fuel Booms Wane, Who Will Clean Up the Mess?

As a teenager growing up outside Pittsburgh, I lived in a home build atop an abandoned coal mine.  Orange-colored acid mine drainage continuously trickled into a nearby drainage ditch, on its way to a local creek and ultimately the Ohio River. Massive piles of mine waste were a constant feature of the view across the valley.

Every day, in some sense, was a reminder of the long-lasting environmental and public health legacy of a fossil fuel boom gone bust.

Today, we are in the midst of another series of fossil fuel busts. Slumping oil and gas prices – triggered by the U.S. shale boom and stagnant global demand – have already led to several bankruptcies among oil and gas firms, with more likely to follow. Things haven’t been much better over in the coal sector – in fact, they’ve been worse. Clark Williams-Derry at the Sightline Institute has been tracking the carnage among coal stocks on Wall Street as declining U.S. demand for coal and stagnant international demand has wrecked the economics of major coal companies such as Peabody Energy and Arch Coal.

Environmental damage of the kind I witnessed daily in western Pennsylvania led policy-makers in the middle of the 20th century to take steps to prevent a repeat performance. Oil drillers and coal companies, it was decided, should be required to set aside funds or obtain bonds to ensure that when the boom turned bust – as it always does – money would be available to clean up the remaining mess.

Unfortunately, as we documented in our 2013 report, Who Pays the Costs of Fracking?, these “financial assurance” laws often have loopholes bigger than an oil well. In some cases, the amount of money drillers are required to set aside is not nearly enough to pay for the costs of reclaiming the well or compensating victims of environmental damage. In other cases, companies avoid bonding entirely by meeting tests designed to measure their financial health (ignoring the fact that a company’s financial standing can go downhill quickly during a sudden downturn in fossil fuel prices). In still other cases, drillers can “temporarily” abandon wells for years, increasing the risk of environmental harm in the interim and raising the risk that the company will not be around when the time comes for cleanup.

All of these problems are happening, or are at imminent risk of happening, in various sectors of the fossil fuel industry:

  • The Associated Press recently found that the number of “temporarily” plugged wells in the Gulf of Mexico has surged, with more than 3,500 now having been temporarily sealed for more than a year and over 1,000 having been temporarily sealed for more than a decade.
  • The Sightline Institute has sounded the alarm about self-bonding in the coal industry. Reuters recently documented concerns among federal regulators about the declining financial health of major coal firms that have traditionally used self-bonding to provide financial assurance for environmental cleanup. By the time a fossil fuel company is financially sick enough to have its self-bonding capacity withdrawn, however, it is likely also to be sick enough that no surety company will want to issue it a reclamation bond at a reasonable price. The result is a Catch-22 in which the very laws designed to protect taxpayers and the environment in the event of a bankruptcy make bankruptcy more likely.
  • Earlier this year, the Wall Street Journal documented how Wyoming taxpayers will likely be on the hook for tens of millions of dollars in cleanup costs following the faded coal-bed methane boom in the Powder River Basin.

With the slowing of the fracking boom in states like North Dakota, Texas and Pennsylvania, those states’ financial assurance requirements for oil and gas drilling are about to receive a stress test. One hopes that the financial assurance rules those states had in place will be sufficient to protect taxpayers and the environment, but there is plenty of room for skepticism.

The larger lessons of this experience are two-fold. First, it is easy in the midst of any extractive boom to giddily anticipate that the good times will roll on forever. The past two centuries have provided example after example that they don’t. The time for government to prepare for the inevitable bust is not when trouble appears on the horizon, but at the very beginning of the boom-bust cycle.

Second, the transfer of the environmental and financial costs of fossil fuel extraction to residents and taxpayers represents yet another hidden subsidy to fossil fuels. As residents of western Pennsylvania, my family and I paid the price for the cheap coal burned in factories and homes nearly a century earlier. We owe it to ourselves and our future to ensure that the full costs of producing fossil fuels are borne by those who benefit from selling them, not shifted to those who have no choice but to pick up the tab.