In an effort to reduce state and federal royalty payments and maximize subsidies from the U.S. government, coal companies have set up subsidiaries to essentially sell the coal they mine to themselves. In some states, nearly half of all coal produced is sold this way.

The fact that these companies are selling such a large percentage of coal back to themselves, rather than to a utility or power plant, constitutes “a fundamental shift in how the coal industry does business,” Claire Moser of the Center for American Progress (CAP) wrote at Climate Progress.

The scheme involves what is known as “captive transactions,” in which companies that mine coal use other companies they own to sell the natural resource at below-market value. That value is what the federal government uses to determine its royalties collected from coal producers leasing federal lands. So the lower the sale price of the coal, the lower the payment to the U.S. Treasury.

In some states, such as Wyoming, more than 40% of the coal produced is first sold to a subsidiary of the same company that mined the coal. That’s “a 17-fold increase since 2004 for the U.S.’s largest coal-producing state,” according to Moser.

CAP found that five of the largest coal companies operating in Wyoming and Montana have collectively created 566 subsidiaries.

By law, coal companies are only required to pay royalties on the first sale. So by making initial “in house” sales at rock-bottom prices, they create an artificially low value in order to evade royalty payments.

“Increasingly, the major coal companies are selling Powder River Basin coal not on an open market, but to an elaborate network of shell companies that they own and control,” Matt Lee-Ashley, a senior fellow and director of the Public Lands Project at CAP, said in a press release. “This gaming of the system is costing federal and state governments millions of dollars in lost royalty payments and giving the Powder River Basin an unfair advantage over other U.S. coal producing regions.”

The Department of the Interior has proposed a rule that it claims will forbid coal mining companies from using captive transactions to intentionally avoid royalty payments. However, even under this rule, coal firms will still pay royalties on below-market pricing and large subsidies will remain in place, according to CAP’s Moser.

-Noel Brinkerhoff, Danny Biederman

To Learn More:

Cutting Subsidies and Closing Loopholes in the U.S. Department of the Interior’s Coal Program (by Matt Lee-Ashley and Nidhi Thakar, Center for American Progress) (pdf)

Coal Companies Are Selling Coal to Themselves To Get More Government Subsidies (by Claire Moser, Climate Progress)

As Renewable Energy Spreads in Europe, U.S. Resists Growth (by David Wallechinsky, AllGov)

Government Subsidies of Fossil Fuels Outdo Renewable Subsidies 6 to 1 (by David Wallechinsky and Noel Brinkerhoff, AllGov)