Funding our Future? Expanding the Severance Tax

In his blog post on Coal Tattoo yesterday, Ken Ward asks "Will W.Va. prepare for a post-coal future?" — it is a question we could and should be asking here in Kentucky too.  Ward points to a new study (PDF) from the West Virginia Center on Budget and Policy that discuss steps West Virginia could take to prepare for the day when coal and natural gas run out.  The report concludes:

West Virginia would benefit greatly from the creation of a permanent severance tax trust fund. An Economic Diversification Fund would help the state meet many of today’s economic challenges, while ensuring that future generations benefit from the mineral wealth of their state. In the past, West Virginia did not gain broadly shared prosperity for its residents, despite the tremendous wealth of natural resources in the state. As the Marcellus Shale gas play begins to boom in West Virginia, the state should take action today to ensure that it truly benefits from the extraction of its valuable natural resources. Without a permanent fund, the economic benefit from the natural resource extraction will decline along with the natural resources themselves.

Ward writes: "The center proposes a 1 percent additional severance tax on coal and natural gas that could go into this fund, and be used a bit at a time to help pay for a variety of economic development efforts — everything from early childhood development programs and college grants to workforce training and infrastructure improvements."

Ward further notes:

According to the report, if West Virginia had created such a program in 1980, the state would now have a trust fund with assets of nearly $1.9 billion — that’s BILLION, with a B.  If started now, the fund would have generate revenues of $5.8 billion by 2035.  The report says:

If West Virginia wants future generations to benefit from the extraction of its natural resources, it must set aside a portion of the severance tax revenue from all natural resources to invest in important public structures that will build a stronger, more vibrant future for the state. To accomplish this task, West Virginia could follow the lead of six other energy states by creating a permanent severance tax trust fund (hereafter referred to as a permanent fund) that converts non-renewable natural resources into a source of sustainable wealth that serves the state today and in the future through targeted investing. Even after the state’s natural resources are depleted, West Virginia could use income from the fund to diversify the economy, make much-needed investments in infrastructure and human capital, lower future tax burdens, and deal with costs associated with past and future mineral extraction.

This is exactly the same conversation we should be having, we need to be having at kitchen tables, in diners and coffee shops across the region.  Our elected representatives in Frankfort talk plenty about how to spend existing coal severance money — most recently with the proposal to bring the University of Pikeville into the state public university system.  But we need to be talking about longer-term inputs into severance funds — bringing enough severance funds from coal and gas to ensure we have options when the day eventually comes that extraction of natural resources no longer plays a significant role in eastern Kentucky counties.  That conversation needs to start in the heart and homes of Eastern Kentucky, and be carried all the way to Frankfort.

With the newest data released last month from the Energy Information Administration in a preview of the 2012 Annual Energy Outlook (PDF), showing a meaningful decline in Appalachian coal production "with most of the decline occurring by 2020" — we need to start this conversation, and the search for solutions now.

From the EIA report:

In the AEO2012 Reference case, domestic coal production increases at an average rate of 0.3 percent per year, from 22.1 quadrillion Btu (1,084 million short tons) in 2010 to 23.5 quadrillion Btu (1,188 million short tons) in 2035. Mines in the West account for nearly all the projected increase in overall production, although even Western coal production is expected to decline somewhat between 2010 and 2015 as low natural gas prices and the retirement of a sizable amount of coal-fired generating capacity leads to a decline in overall coal consumption in the electricity sector. On a Btu basis, the share of domestic coal production originating from mines in the West increases from 47 percent in 2010 to 56 percent in 2035, and the Appalachian share declines from 39 percent to 29 percent during the same period, with most of the decline occurring by 2020. In the Interior region, coal production remains relatively stable over the projection period, with production in 2035 higher than in 2010. (emphasis added)

See Ken Ward's full post on the West Virginia Center for Budget and Policy report here, and more on the recent Annual Energy Outlook report here.

Kristin Tracz

About Kristin Tracz

Kristin Tracz served MACED’s Research and Policy team from 2009-2012 working on clean energy policy, energy efficiency programs and the Appalachian Transition Initiative. She joined MACED after finishing her Master of Environmental Management degree at the Yale School of Forestry & Environmental Studies. She now lives and works in Washington, DC.