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Coal Mulls Threat From EPA Emissions Reductions

Updated from 10:26 a.m. Tuesday with stock price action and light editing throughout.

NEW YORK (TheStreet) -- Coal companies and analysts found little to complain about as they responded to the Obama administration's rules, proposed Monday, that are aimed at reducing carbon emissions. While some were arguing that the targets will raise electricity prices, most in the industry seemed to accept that greater efficiency was not only necessary for coal burning plants but already under way.

The Environmental Protection Agency proposal, which seeks to reduce carbon emissions from power plants 30% by 2030, includes a great deal of flexibility and several key concessions to the industry. Coal, which produces more than a third of the electricity used in the U.S. and the lion's share of carbon dioxide emissions from utilities, has the most to lose under the EPA proposal.

Stern Agee analyst Michael Dudas emphasized in a report Tuesday that the rules could face significant political and judicial challenges before it takes effect next year.

This aggressive non-legislative rule making could face failure if the Judiciary limits EPA's ability to reach beyond the fence of the existing plants to reduce overall emissions. As debate rages on, we believe coal and natural gas inventory dynamics, competitive pricing trends, and signs of more concrete efforts to curtail global metallurgical oversupply will drive share price action during the next several months.

But Dudas added, as TheStreet noted Monday, investors feel some relief over the Environmental Protection Agency announcement:

There were concerns EPA might use a more recent base year for measurement. Since EPA is using 2005 as base year, we believe the proposal is less onerous as the agency is giving industry credit for 15% carbon emission reductions already achieved from 2005 to 2012.

While there will certainly be legal challenges to these rules, the likelihood of success is far from certain. The courts have so far upheld several key regulatory efforts by the EPA regarding greenhouse gases. As The Wall Street Journal pointed out in an article last week, "Under long-standing legal principles, courts give deference to administrative agencies like the EPA as long as they don't regulate in an arbitrary and capricious manner."

The new rules face political challenges, notably from Senate Majority Leader Mitch McConnell, a Republican from the coal state of Kentucky. McConnell is running for reelection and has made his opposition to President Obama's policies and the new rules in particular a centerpiece of his campaign.

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Peabody Energy (BTU - Get Report), the largest coal energy producer in the world, joined its voice to that political fight. The company did not respond to an emailed request for comment Monday after the proposed rules were announced, but late in the afternoon the company issued a statement on its Web site arguing that the imposed targets would raise electricity prices. However, the company also suggested that coal-energy companies needed to modernize toward greater efficiency, a position that seems in line with the EPA's expectations.

Positioning cheap energy supplied by coal as a "right" and its own mission as "the will of the people," the company's statement also took a potshot at the global warming science driving the push for carbon dioxide emissions reductions.

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