Pollution control and input markets: The creation and capture of rents from sulfur dioxide regulation∗

This paper analyzes the effects of pollution control regulation on input markets. Under Title IV of the 1990 Clean Air Act Amendments, sulfur dioxide emissions from large coal-fired electric power plants in the United States are regulated by a cap-and-trade system. We ask the question: Who captured the rents from Title IV? We first show that Phase I of the tradeable permits program, from 1995 to 1999, coincided with a dramatic expansion in the geographic extent of low-sulfur coal from the Powder River Basin in Wyoming. We then analyze detailed data on coal deliveries from the Powder River Basin. Our results suggest that the two railroads that carry coal east from the PRB lowered their marginal transportation rates but raised the fixed components of the delivered price. These changes increased the price of PRB coal over most of its range, while lowering it at the extensive margin. Moreover, data on minemouth prices for PRB coal indicates that coal mines there did not raise prices substantially under Title IV. Hence the railroads captured rents from the regulation. JEL codes: Q28, L51, L92, L94. ∗ We are grateful to Paul MacAvoy and Erin Mansur for helpful comments, and to Daryl Newby of the Kentucky Public Service Commission and Jim Thompson of Energy Publishers for assistance in gathering information on coal contracts. †Haas School of Business, 2220 Piedmont Ave., Berkeley, CA 94720-1900; [email protected]; tel (510) 643-1426; fax (510) 643-1420. ‡Yale School of Management, P.O. Box 208200, 135 Prospect St., New Haven, CT 06520-8200; [email protected]; tel (203) 432 6024; fax (203) 432 6974. 1 USC FBE APPLIED ECONOMICS/CLEO WORKSHOP FRIDAY, October 31, 2003 1:30 pm 3:00 pm; Room: HOH-601K presented by Meghan Busse