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Donald Trump again ignores the real reason US coal is on the decline

Donald Trump on Sunday reiterated his claim that he will revive American coal companies, but in so doing he has again failed to acknowledge that the U.S. natural gas boom he celebrates is the primary reason coal use is declining in the United States.

"Hillary Clinton wants to put all the miners out of business. There is a thing called clean coal. Coal will last for 1,000 years in this country," Trump said during the debate. "Now we have natural gas and so many other things because of technology. We have unbelievable — we have found over the last seven years, we have found tremendous wealth right under our feet."

Clean coal technology remains a subject of debate. But as the technology and policies necessary to bring it to market progress, natural gas is poised to unseat coal as the top source for electricity generation this year as the gap in prices between the two energy sources continues to narrow, the U.S. Energy Information Administration projected in March.

Coal and natural gas now generate about the same share of U.S. electricity, following consistent gains in market share for natural gas that began before 1990.

"The recent decline in the generation share of coal, and the concurrent rise in the share of natural gas, was mainly a market-driven response to lower natural gas prices that have made natural gas generation more economically attractive," the EIA wrote.

That is a view widely held by energy economists, but one Trump did not mention on Sunday and has not acknowledged in other major speeches on his energy policy.

The Republican presidential candidate has repeatedly claimed that he will boost economic output, create millions of new jobs and put coal miners back to work. But the windfalls Trump touts fail to take into account the real reason the coal industry is struggling, and originate from an industry-linked report whose findings rely on a forecasting model that often overstates the economic benefits of drilling, according to economists who study U.S. shale oil and gas.

The Trump campaign was not immediately available for comment on Monday, and it did not respond to separate requests for comment when CNBC published the economists' opinions in the past.

Immigration and trade have dominated much of the policy conversation this campaign season, but the next president will take office at a crucial time for the energy industry. America's revolution in high-tech oil production has been sidetracked by — and has contributed to — a two-year crude price rout that has bankrupted dozens of domestic energy companies.

Trump said in August that lifting restrictions on oil and gas would increase GDP by more than $127 billion, add about 500,000 jobs and boost wages by $30 billion each year over the next seven years.

Those figures come from the Institute for Energy Research, a nonprofit that advocates for a free market approach to energy. It typically casts fossil fuels as the most economic form of energy generation, promotes research that says green energy jobs are unsustainable and claims there is an "enormous volume of sensationalized, simplistic and often plain wrong information" on climate change.

"This is not academic research and would never see the light of day in an academic journal." -Thomas Kinnaman, Bucknell University economics department chair

The IER is affiliated with the American Energy Alliance, one of a number of groups funded by a network of donors who have been marshaled to action by prominent conservatives Charles and David Koch. The brothers' Koch Industries and its subsidiaries explore for and produce oil and natural gas, market coal and operate or own 4,000 miles of oil, fuel and chemical pipelines.

The Koch brothers have not endorsed Trump.

The IER study does not actually attribute the gains to a lifting of restrictions, as Trump indicated, but to opening all federal lands to oil, gas and coal leasing. It is currently barred or temporarily blocked in some parts of the U.S. lower 48, the outer continental shelf, the Gulf of Mexico and the Arctic National Wildlife Refuge.

To be sure, America's shale oil and gas revolution has transformed sleepy hamlets like Williston, North Dakota, into boomtowns and made millionaires of many landowners. But economists say measuring drilling's impact on GDP, wages and jobs is not as easy as Trump suggests.

The IER report uses a method of forecasting called the input-output model, which is frequently used by consultants and government agencies to make projections about the effects of economic activity.

But a number of economists say that model is not well-suited to predicting how more drilling will produce windfalls in other sectors, and academics are skeptical of the method because the results, or outputs, rely so heavily on the assumptions, or inputs.

"This is not academic research and would never see the light of day in an academic journal. The pioneering research ... from years ago is rarely employed anymore by economists," said Thomas Kinnaman, chair of the economics department at Bucknell University, who reviewed the IER report for CNBC.

Kinnaman said the technical assumptions used throughout the study are not "egregious," but he noted that the paper makes no attempt to weigh the environmental and social costs of opening federal lands against the benefits.

Joseph R. Mason, author of the IER study and professor of banking at Louisiana State University, acknowledged that input-output models are not published in academic journals "because economics has moved on" from the method developed by Wassily Leontief, for which he won a Nobel Prize in economics in 1973. But he said it is still a useful tool, and one that is widely utilized by the government in a wealth of economic impact studies.

Further, input-output forecasts are not designed to create absolute, measurable results in the real world, Mason said. As such, they should not be compared against studies conducted after the actual activity takes place, he noted.

Same assumptions, different world

Peter Maniloff, assistant professor of economics at the Colorado School of Mines, said the IER study is based on a questionable assumption.

"The IER report assumes that policy restrictions are the major factor holding back coal, oil and gas production," but it has more to do with straightforward economics, he said. "Domestic oil drilling on available land has dropped by three-quarters since 2014 due to low prices."

U.S. drillers have slashed capital spending and laid off tens of thousands of workers to survive an oil price collapse brought on by massive oversupply. A chief contributor was surging U.S. production over the last decade as wildcatters harnessed the power of horizontal drilling and hydraulic fracturing, a method of releasing oil and gas from shale rock by pummeling it with water, minerals and chemicals.

More drilling would delay rebalance and an ultimate price recovery, keeping the pressure on beaten-down American producers. Mason counters that oil prices are expected to eventually recover, and it makes sense to lease federal lands ahead of that rebound.

Coal can't compete with natural gas

The IER report makes similar assumptions about coal production that discount the effects of regular economic factors, according to Maniloff.

"Coal production and prices have been soft due to pressure from cheap natural gas and soft international demand," he told CNBC in an email.

But IER Director of Communications Chris Warren said one cannot ignore the effect of government forces on energy. Congressional research shows oil and gas production on federal lands has lagged output on state and private property, he noted. Indeed, oil and gas drillers often complain that it takes too long to get approval to drill on federal lands and too few auctions for leases have been held.

Further, the Environmental Protection Agency's Mercury and Air Toxics Standards and its carbon dioxide regulations have put pressure on coal miners, Warren said. The U.S. Energy Information Administration does ascribe part of the effect of coal-fired power plant retirements to the Mercury and Air Toxics Standards rules, but concurs with Maniloff that the chief culprit in reduced coal consumption is that it can't compete with cheap and abundant natural gas.

Energy's spillover effects

Of the hypothetical $127 billion in increased economic output that IER ties to scrapping restrictions, the group attributes more than half of the supposed gains, or $68 billion, to "spillover" effects into other industries. IER says, for example, that increased drilling in offshore fields "might lead to more automobile purchases that would increase economic activity in Michigan."

Similarly, most of the 552,000 jobs hypothetically gained would not be directly related to the oil and gas sector. IER believes 75 percent of the employment gains would be in high-wage, high-skill employment like health care, education, professional fields and the arts.

Maniloff's research into the economic effects of increased drilling shows a substantial boost in employment and wages in the boomtowns where drilling takes place, and finds that most statistically significant labor gains outside the energy industry are in the construction and retail sectors.

Though Maniloff acknowledges energy executives and investment bankers typically have more cash to spread around during boom times, he said it is too difficult to draw a straight line between increased activity in the oil patch and an improvement in complex urban economies.

Maniloff also noted little impact on the transportation sector, which led him to believe that many of the truckers who haul water to fracking sites came from beyond the regions where drilling occurred. That reflects one of Kinnaman's findings from his study of shale gas production in Pennsylvania: Not all the windfalls remain in the regions that must deal with the pollution, noise and potential health impacts that are part and parcel of industrial activity.

Mason, the IER study author, acknowledged to CNBC that he did not attempt to quantify the environmental costs of more drilling and mining, but he noted that he also left out a potential economic benefit: Oil, gas and coal production inevitably leads to environmental damage, which requires the services of remediation companies.

"I know it's a perverse argument, but it is there," he said of the economic benefits that can come from environmental damage. "As economists, we're caught. ... This is not about what should be, but about what is."

Democratic presidential nominee Hillary Clinton has vowed to ramp up clean energy while reducing America's dependence on fossil fuels. Meanwhile, Trump has vowed to throw out President Barack Obama's hard-won Paris climate change deal.