Carbon Offshoring: India, China buying U.S. coal mines, shale gas fields, LNG terminals

Daniel M. Firger
Associate Director

Foreign companies are buying up U.S. coal mines.

In a statement on November 12, the chairman of Coal India Ltd., a state-controlled entity and the world’s largest coal producer, with a near-monopoly on Indian coal mining, confirmed that the firm was in talks with several U.S. coal companies to buy stakes in mines throughout the continental U.S.  According to the Associated Press, Coal India has budgeted $1.2bn this year alone to buy American, Australian, and Indonesian coal mines.  Facing voracious energy demands and a yawning gap between domestic supplies of coal and projected needs, the company is going on a global buying spree.

It is not alone. Reliance Industries, also of India, bought a $3.4bn stake in three U.S. shale gas companies earlier this year. In March, India’s Essar Group acquired Trinity Coal for $600mn; the company has active mines in Kentucky and West Virginia. China’s ENN Energy Trading, a subsidiary of one of China’s largest natural gas companies, signed a preliminary purchase agreement in early November with Cheniere Energy for 20 years of processing capacity at Cheniere’s Sabine Pass LNG terminal, located on the border of Louisiana and Texas. And China National Offshore Oil Corporation Ltd. (CNOOC) agreed in October to pay up to $2.16bn for a 33.3 percent stake in Chesapeake Energy’s interest in the Eagle Ford shale play. The deal, if concluded, would represent the largest Chinese investment ever in the US energy sector.

These developments may cheer those economists, including members of the Obama administration’s Council of Economic Advisors, who hope export-led growth will propel the U.S. economy out of its current doldrums.  But they ought to send a chill down the spine of anyone hoping for a thoughtful approach to climate change policy from the White House (which contrary to what pundits say is still possible, even in the absence of federal cap-and-trade legislation).  As any seventh grader can tell you, it doesn’t matter much where greenhouse gasses are emitted; aggregate global emissions are what counts.  While the problem of “carbon leakage” resulting from the regulation of domestic emissions is well understood (and was dealt with in Waxman-Markey and other proposed climate bills), the issue of “carbon offshoring” is not.

Dirty fossil fuel exports have been relatively unexamined by U.S. environmentalists and policymakers. And the acquisition by foreigners of U.S. fossil fuel resources, such as coal mines, is such a new phenomenon that practically no one in the climate world has anything to say on the matter.  But as energy-hungry Chinese and Indian firms take fuller advantage of the strong U.S. desire to boost exports and reduce the current account deficit, there is a real danger that climate integrity will get thrown under the bus.

What can be done? For starters, the Committee on Foreign Investment in the United States (CFIUS) might think about blocking dirty energy deals that result in carbon offshoring, perhaps on national security grounds.  This may be less far-fetched than it sounds, since the Pentagon’s most recent Quadrennial Defense Review highlighted climate change as a threat to national security.

When the issue is exports rather than outright foreign acquisition of U.S. assets, however, things can get tricky.  Export quotas violate international trade law, and can be challenged before the WTO as a breach of U.S. obligations under Article XI of the Global Agreement on Tariffs and Trade (GATT).  Although there may be some room to maneuver under the GATT’s relatively narrow exceptions for environmental measures, a quota on U.S. exports of coal would likely generate significant controversy both internationally and, of course, in states like West Virginia, where nearly 20 percent of the coal produced last year was sold overseas.  Export taxes, though not illegal under international trade law, are perhaps more problematic, as the imposition of taxes or tariffs on exports violates Article I, Section 9, Clause 5 (the “export clause”) of the U.S. Constitution.

The Columbia Center for Climate Change Law is currently examining this issue in greater depth, and welcomes others to do the same.

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Associate Director and Fellow, Center for Climate Change Law