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December 20, 2017

It’s Easy for Santa to Move Coal

December 20, 2017
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An intriguing recent post at the Energy Institute Blog explains the “cushion in coal markets” that will make them “harder to kill.” As the language suggests, the author (Severin Borenstein) is not a fan of coal. Even so, the analysis is interesting because it shows just how crude much of the climate change policy debate has been. The post concludes that a carbon tax of a particular size, for example, might not reduce US coal production as much as enthusiasts initially believed.

The blog post summarizes academic research by a doctoral student, Louis Preonas. Here is the opening of the post, which sets the context and distills the findings:

Discussions of U.S. coal policy generally focus on coal mining or coal burning, but hardly ever on coal transportation, the critical link between the two. Yet, transportation is a significant percentage of the total cost of electricity from nearly all coal-fired generators. And hidden in that link between mining and generation is a protective layer that is likely to slow the decline of coal in the American energy system.

More specifically, the post explains that “rail transportation of coal to many power plants comes with fat margins for the railroads.” Therefore, at least for these particular power plants, even a stiff new carbon tax would not translate entirely into higher operating expenses for the plant, the way simple calculations based on coal’s carbon content would suggest.

Rather, the study—which looked at the coal industry response to increased competition from natural gas—estimates that a large fraction of the extra cost (associated with a carbon tax) would be borne by the railroads, which would reduce their profit margins in order to keep their business moving coal.

How big an effect are we talking about? Borenstein explains:

OK, the effects of fracking are interesting, but what should really grab the attention of policymakers is what this implies for the effects of carbon pricing on coal plants. The estimates of the response to natural gas prices can be applied to forecasting the possible response of coal generation to a carbon price. Preonas shows that for the most captive coal plants as much as one-quarter of a carbon price would be absorbed by shippers, meaning that those plants would effectively be responding to a 25% lower carbon price than other generators or any other producers of [greenhouse gases]. [Bold added.]

This is a pretty big result, especially because coal-fired power plants are some of the chief targets in the climate policy debate.

Conclusion

The research from Louis Preonas suggests that coal-fired power plants in the U.S. may be much less responsive to a new carbon tax than simple calculations implied. This means a carbon tax of a given magnitude would have a lower impact on greenhouse gas emissions than the current models estimate, meaning that the pain inflicted on American consumers (in the form of higher energy prices) would be matched with a smaller ostensible benefit (in terms of reduced emissions).

Advocates of aggressive, top-down regulation might spin this result as an argument for direct controls on power plants. My interpretation is the opposite: As the study shows, the real economy is a lot more complex than the standard models capture. The hubris of using taxes and regulations to shoot for a “global temperature target” should be apparent to anyone but the most overconfident technocrat.

Of course, given the timing of my post, we should conclude by saying there’s one group of Americans who will always get coal shipped cheaply—the naughty ones.

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