Rail Companies May Mitigate Carbon Tax Impact on Coal-Fired Energy, Says Research

United States (Natural Energy News): New research has unveiled a potential lifeline for coal-fired power plants in the face of tightening US climate policies. If such policies continue to disadvantage coal in favor of cleaner energy sources, rail transportation companies may step in to cushion the blow by lowering transportation prices, according to a study published in the Review of Economic Studies by University of Maryland economist Louis Preonas.

"These findings underscore the importance of looking at the whole fossil fuel supply chain," Preonas emphasized in a media statement. "If policymakers ignore real distortions in the market, like monopoly power in rail shipping, their climate policy efforts may not achieve the intended results."

Preonas's study used the significant drop in natural gas prices over the past decade as a natural experiment to understand how market pressures influence the pricing of coal-fired power generation.

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By scrutinizing data on coal deliveries, rail carrier utilization of the US rail network, and hourly energy generation from power plants, Preonas demonstrated that as competition from natural gas forced coal-fired plants to lower electricity prices, railroad companies responded by reducing their coal transportation fees. This strategic move allowed the railroads to support the coal market, preventing significant business losses by bridging the cost gap between coal and natural gas.

Furthermore, the economist estimated that without the railroads' intervention, natural gas use would have surged even further, potentially reducing greenhouse gas emissions by an additional 10% beyond current levels.

The research paper also suggests that the rail industry is likely to absorb a substantial portion of any carbon tax or fee imposed on coal-burning plants. This would ultimately favor the coal industry while putting pressure on the railroads and their shareholders.

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Preonas's study highlighted an essential caveat: railroads can only effectively absorb a carbon tax for specific facilities. Approximately 44% of US coal-fired plants rely on a single railroad for transportation. These plants are particularly dependent on their rail carrier, granting those carriers higher profit margins and better positioning them to absorb costs to sustain coal plant operations.

In contrast, in regions where multiple railroads serve plants or where alternative transportation options, such as shipping by water, exist, rail companies face more competition and may have less room to implement significant price reductions.

This research underscores the imperative need for further investigations into the long-term consequences of market power held by rail transportation companies. It also highlights their potential impact on decisions regarding coal-fired plant retirements and the economic well-being of coal mining communities.

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Preonas's work serves as a broader call to action, advocating for the inclusion of market power distortions into climate policy considerations for other carbon-intensive industries like oil refining and aluminum production. In doing so, policymakers can develop more effective strategies to address climate change while acknowledging the intricate dynamics of supply chains and market competition.

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