Rail companies can weaken effects of carbon taxes on coal-fired energy – research

Railroads are likely to cut transportation prices to prop up coal-fired plants if US climate policies further disadvantage coal in favour of cleaner energy sources, new research has found.

In a paper published in the journal Review of Economic Studies, University of Maryland economist Louis Preonas explains how and why rail transportation companies have the power to reduce the effectiveness of carbon taxes imposed on coal-fired energy plants.

“These findings underscore the importance of looking at the whole fossil fuel supply chain,” Preonas said 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.”

For his study, the researcher used the drop in natural gas prices over the past decade as a natural experiment for understanding how market pressures affect the price of coal-fired power generation. 

By analyzing data on coal deliveries, rail carrier use of the US rail network and hourly energy generation from power plants, Preonas showed that as competition from natural gas forced coal-fired plants to reduce electricity prices, railroad companies reduced their coal transportation fees. By absorbing some of the cost difference between coal and natural gas, the railroads propped up the coal market to avoid losing business.

The economist also estimated that without the railroad’s propping up of the coal industry, natural gas use would have increased even more, reducing greenhouse gas emissions by an additional 10% over current levels.

According to the paper, the rail industry’s response to price competition in the coal market indicates that they are likely to absorb a significant portion of any carbon tax or fee that may be applied to coal-burning plants. This would ultimately benefit the coal industry at the expense of the railroads and their shareholders.

Preonas also showed that railroads can only absorb a carbon tax for certain facilities. About 44% of US coal-fired plants are served by a single railroad. Those plants are most reliant on their rail carrier, which means those carriers have higher profit margins and are better positioned to reduce costs to keep a coal plant operational. 

In places where plants are served by multiple railroads or able to receive shipments by water such as a nearby river or lake, rail companies face more competition and may have less room for price cuts.

The study underscores the need for future research to explore the long-term implications of market power among rail transportation companies, including their potential impact on coal-fired plant retirements and the fiscal health of coal mining communities.

Preonas said that this work also serves as a broader call to incorporate market power distortions into climate policy projects for other carbon-intensive industries such as oil refining and aluminum production.