The Lessons of a Coal Giant's Collapse

Somebody has to clean this up.

Photographer: Luke Sharrett/Bloomberg

The bankruptcy of Peabody Energy Corp., the largest U.S. coal producer, is the most vivid illustration yet of the market's deep and welcome shift away from coal. It could also be calamitous for the environment: If Peabody goes out of business, who will clean up the pollution it has left behind?

Under federal law, companies must pay for the reclamation of the land they have contaminated though mining. The usual way to do this would be to require them to put up money or collateral to cover those costs. But some states, with the federal government's blessing, allow companies to "self-bond" -- essentially, to promise that when the time comes to clean up a mine, they'll have enough money to do the job.

QuickTake Confronting Coal

Peabody's bankruptcy shows the folly of this practice. Of the six states in which Peabody has mines, four -- Wyoming, New Mexico, Illinois and Indiana -- allow self-bonding. In those states, taxpayers could be on the hook for up to $1.15 billion.

A federal bankruptcy judge has some discretion to force Peabody to make good on its commitments to states, and the judge should use it. Failing to clean up an old mine, beyond leaving behind an eyesore, can let toxins leak into the water supply, threatening animals and people alike. Leaving a surface mine unreclaimed can also prevent local communities from using the land for grazing, farming, hunting and recreation. Wyoming's Powder River Basin alone will require an estimated $800 million.

The broader question is how many more Peabodys there may be, and how to pay for the environmental damage they have caused. The company is the latest in a string of U.S. coal producers to fail, in an industry that has lost 20,000 jobs and 94 percent of its market value since 2011. U.S. coal production in the first three months of 2016 fell 38 percent from the same period last year.

One thing states should do is not to allow the practice of self-bonding. In Peabody's case, the federal government in February warned states that continuing to allow the practice was a bad idea. Yet Illinois, for example, continued to allow it even after the state's attorney general raised concerns about Peabody's ability to meet its obligations.

Yes, requiring coal producers to bear the full cost of their cleanup obligations may push some into bankruptcy. And mining companies are some of these states' largest employers. But states can't halt the long slide of the coal industry by allowing coal companies to discount their environmental obligations. And even if they could, regulators' responsibility is to the interests of the public. Better to insist on honest accounting, then let the market decide who survives.

It's an issue that affects more than just coal mining. The federal government allows oil and gas companies to self-bond, a practice now under review for companies working in the Gulf of Mexico. The case of Peabody is a warning to all levels of government about the risks of letting companies simply vouch for their ability to clean up after themselves. 

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.