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Local Coal Demand Induced by Political Influence

Monday, March 6, 2017 5:17
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Jonathan Eyer and I have released a new NBER paper studying power plant demand for local coal.  Consider a map of the USA featuring circles for every power plant in the U.S and triangles for every coal mine in the U.S.  Each of these power plants might trade with each coal mine.  Using GIS, we calculate the physical distance between each of these potential trading partners.  A standard gravity model predicts that there will be more trade between pairs that are closer to each other.  Controlling for this distance, we then ask the following question;  ”If the power plant and mine are located in the same state, are they more likely to trade with each other?”  The answer is yes!  Recall, that we are controlling for physical distance.

So what?  We argue that pairs in the same jurisdiction face a powerful local politician who nudge the power plant to purchase from the local mine.  This is a form of local protectionism that helps to prop up the coal mining communities, their families, their labor market prospects and their local home price values.  Who loses from this local protectionism?  In the second half of the paper, we document that air pollution is worse and GHG emissions are higher because this special treatment of coal leads it to continue to be an energy source. So to say that again, the transition away from coal would be faster if local interests didn’t use political power to prop it up.

In recent years, the share of U.S electricity generated by coal has fallen from nearly 50% to 33%. The costs of this transition are spatially concentrated, and mining states have already lost income due to the reduced demand for coal. Coal states have enacted policies to encourage local power plants to purchase from within state mines. We document that power plants in states and counties with substantial mining activity are more likely to be coal fired and to purchase more within political boundary coal. These results are robust to including flexible controls for the distance from power plants to mines. While coal states benefits from local protectionism, these efforts impose social costs because coal mining and coal burning creates significant environmental consequences. We quantify these effects and find that a one-percentage point increase in the proportion of coal plants in a NERC region with an in-state coal mine results in approximately 2.3 million additional annual tons of CO2 emissions.


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