On the surface, the news that the Environmental Protection Agency is cracking down on carbon dioxide emissions seems like the beginning of the end for coal stocks like Peabody Energy (BTU), Walter Energy (WLT) and Arch Coal (ACI).
However, before anyone assumes the worst for WLT, ACI or BTU stock — or any other coal stocks — there’s a much bigger flipside to the story.
Don’t Dig a Grave for Coal Stocks Yet
Just as a quick recap, the EPA officially proposed on Monday that the nation take the necessary actions to reduce carbon emissions by 30% (from 2005′s levels) by the year 2030. The proposal itself doesn’t explicitly and solely target coal, though considering coal produces about 40% of the United States’ electricity and burning it is twice as dirty as natural gas, investors quickly connected the dots.
The end result: ACI stock dropped 3.1%, in addition to the 22% pullback Arch Coal shares saw over the course of May. WLT stock fell 5.3% on Monday following its 32% selloff last month.
Investors knew the proposal was on the way weeks ago.
The $64,000 question is, are investors of coal stocks right to be worried here, or is this weakness a buying opportunity?
As it turns out, there are three reasons the latter might be the more plausible choice.
1. The EPA proposal still is subject to change
It should be made clear to anyone who currently owns BTU, ACI, WLT or other coal stocks that the proposal so far is just that — a proposal. Public hearings will be held in late July to get feedback from both sides of the table.
As expected, the pro-coal camp is already fine-tuning its arguments. The planned pushback so far consists of threats of lawsuits to be filed against the EPA by states that heavily rely on coal power for energy and/or revenue. The arguments might hold some water, too.
2. The EPA has more bark than bite
The new standard of greenhouse gas limitations might be established by the Environmental Protection Agency, but it’s leaving it up to individual states to come up with a plan to reduce the carbon output of power plants in those respective domains.
Problem: There’s no clear recourse for states that don’t abide by the new rules.
The EPA has preemptively notified states that if they don’t come up with their own game plan, the agency will impose its own plan on the states. What the EPA has not done, however — and has little authority to effectively do — is clarify how it could actually enforce such a plan, particularly when the political or social support for the plan is as wobbly as it is for the clean power proposal unveiled Monday.
3. We were on the path to a 30% reduction in carbon output, anyway
With all of that being said, one of the key details that investors of coal stocks have overlooked in the matter is how we’re already halfway to a 30% reduction in the greenhouse gases we were creating in 2005.