Preonas, Louis “Market Power in Coal Shipping and Implications for U.S. Climate Policy” (Revised May 2022) | WP-285R | Appendix | Blog

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 paper estimates how coal-by-rail markups respond to changes in coal demand. Using both reduced-form and structural methods, I identify markups in a major intermediate goods market under relatively weak assumptions. 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 $3.8 billion, compared to a counterfactual where markups did not change. I find that incomplete pass-through would likely erode the environmental benefits of a carbon tax, while shifting the tax burden towards upstream railroads.