CSEM WP 137 Market Effects of Environmental Regulation: Coal, Railroads, and the 1990 Clean Air Act

Title IV of the 1990 Clean Air Act Amendments introduced a cap-and-trade system for sulfur dioxide emissions from electric power plants in the United States. This paper analyzes the effects of that regulatory change on the prices charged by the two railroads that hauled low-sulfur coal east from Wyoming. We estimate the effect of the tradeable permits regime by comparing prices at affected plants (called “Table A plants”) before and after the allowance market took effect, and by comparing prices at those plants to prices at unaffected plants. We show that after Title IV took effect, the delivered price of low-sulfur coal — controlling for the minemouth price of coal and the variable cost of transportation — rose at Table A plants within approximately 1000 miles of the Powder River Basin, and fell at Table A plants located further away. This shift in the delivered price schedule of PRB coal is consistent with a theoretical model of the effects of emissions regulation on demand for low-sulfur coal, and the corresponding optimal pricing strategy by a carrier with market power. Our results suggest that the railroads were able to price discriminate among power plants on the basis of the environmental regulations governing the plants. JEL codes: Q28, L51, L92, L94. ∗We are grateful to Erin Mansur in particular for many comments that improved this paper. We also thank Spencer Banzhaf, Severin Borenstein, Michael Greenstone, Jon Levin, Paul MacAvoy, Fiona Scott Morton, Sharon Oster, Chris Timmins, Frank Wolak, Rob Williams, Florian Zettelmeyer, and seminar participants at Berkeley, USC, UCF, Dartmouth, Harvard, Stanford, and the NBER Summer Institute for their comments and suggestions. Daryl Newby of the Kentucky Public Service Commission and Jim Thompson of Energy Publishers provided helpful assistance in gathering information on coal contracts. †Haas School of Business, 2220 Piedmont Ave., Berkeley, CA 94720-1900; [email protected]; tel (510) 642-9589; fax (510) 643-5180. ‡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.