Market Power in Coal Shipping and Implications for U.S. Climate Policy

Louis Preonas

The Review of Economic Studies, 2024, vol. 91, issue 4, 2508-2537

Abstract: Economists have widely endorsed pricing CO2 emissions to internalize climate change-related externalities. Doing so would significantly affect coal, the most carbon-intensive energy source. However, U.S. coal markets exhibit an additional distortion: the railroads that transport coal to power plants can exert market power. This article estimates how coal-by-rail markups respond to changes in coal demand. I identify markups in a major intermediate goods market using both reduced-form and structural methods. I find that rail carriers reduce coal markups when downstream power plant demand changes due to a drop in the price of natural gas (a competing fuel). My results imply that decreases in coal markups have increased recent U.S. climate damages by $11.9 billion, compared to a counterfactual where markups did not change. Incomplete pass-through would likely erode the environmental benefits of an incremental carbon tax, shifting the tax burden towards upstream railroads. Still, a non-trivial tax would likely increase welfare.

Keywords: Market power; Energy markets; Carbon tax pass-through (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:91:y:2024:i:4:p:2508-2537.

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