Editor’s note on our Economics of Climate Change series:
Climate change is happening. That is science’s unequivocal conclusion. But what should be done about it is a much more difficult question and the domain, at least in part, of economics. Determining the costs of inaction and the benefits of action to avoid, mitigate and adapt to climate change is one of the greatest challenges facing the economics profession today. The results of this cost-benefit calculation will shape the policy that dictates how the world responds to the preeminent policy challenge of our time. Over the next year we will pay special attention to what economics can tell us about the best ways to respond to climate change.
Over the past five years, U.S. air pollution regulation has made the burning of coal for electricity increasingly expensive, while technology to harvest natural gas has made the burning of that fuel increasingly cheap. This has resulted in widespread fuel-switching in the power sector from coal to natural gas. U.S. greenhouse gas emissions have dropped accordingly. But U.S. production of coal has not, because exports of mined coal to regions like Europe have risen. This begs the question: What is the global emissions impact (which is what matters) of U.S. fuel-switching, given that we may simply be shifting domestic emissions from coal combustion to other parts of the world? Jahred Liddie asks exactly this question (and details the above story of recent U.S. coal trends) in an August article on this blog.
It’s worth continuing his discussion in the context of U.S. policies currently under consideration. Two significant ones immediately come to mind: the Clean Power Plan, and proposals to construct new coal exporting terminals (such as this). The former is the Obama administration’s capstone climate regulation, aimed primarily at cutting carbon emissions at existing power plants. It is widely assumed that its implementation would lead to significant reductions in domestic coal combustion. The latter, in contrast, is a (yet to be made) decision of whether to allow the enlargement of U.S. capacity to export coal (from both the Pacific Northwest and the Gulf Coast). Economic logic suggests that such capacity expansion would make the U.S. export of coal significantly cheaper and correspondingly more attractive to other countries.
We thus have, on the one hand, a policy that could make it harder to burn coal in the U.S., and on the other hand, a policy that could make it easier to burn coal abroad. Global emissions impacts are therefore uncertain. This issue is contentious, relevant, and, thankfully, getting attention in popular media. But independent attempts to resolve the uncertainty, particularly in the global emissions impacts of U.S. coal exports, have led to divergent conclusions. One set of studies (like those of researchers at the University of Montana, the Tyndall Centre for Climate Change Research, and the consultancy CO2 Scorecard) finds that increased export of U.S. coal will indeed raise global emissions. Meanwhile, a study by the Energy Policy Research Foundation finds that increased coal export will have zero impact on global emissions. And a not-yet-published study by economists at Stanford University actually suggests that increased coal export will reduce emissions!
The difference in findings primarily comes down to whether one believes that an uptick in U.S. coal export will add to current coal consumption, or displace it. The stances of those with polar-opposite findings are here illustrative. The authors of the CO2 Scorecard study believe that exports are additional and thus are responsible for increases in coal-burning outside the U.S. Based on that belief, they estimate that, from 2007 to 2012, the international increase in emissions due to rises in U.S. coal export more than offset domestic decreases achieved through fuel-switching. On the flip side, the leader of the Stanford study believes that exports are substitutes for existing coal resources, so that they do not drive any increase in the burning of coal worldwide. Rather, they drive a decrease, because rises in U.S. exports push up the price of U.S. coal and prompt further U.S. fuel-switching towards natural gas. On net, he is thus suggesting that increased coal export will cut global emissions – i.e., be good for the climate.
In economic parlance, it is the price elasticities of demand for and supply of coal that determine who is right in this context. For example, China’s price elasticity of demand for coal tells us how its demand for (and thus consumption of) coal will change if the U.S. builds new export terminals and is thereby able to export coal at a lower price. Unfortunately, this sort of value is difficult to estimate. At the moment, then, we are left to debate. The Stanford authors’ perspective says that China’s demand for coal is highly inelastic: National consumption is dictated by inflexible central plans five years at a time, so we should not expect China to burn more coal just because the U.S. will be able to supply it more cheaply. The counterpoint, noted by the Montana authors and CO2 Scorecard, says that assuming China’s coal demand to be inelastic is tantamount to ignoring a decades-old, consistent research finding: People do indeed respond to lower energy prices by consuming more energy.
Of course, one cannot look only at a single country and come up with the right answers, even if China is the world’s largest consumer of coal. For instance, it is important to understand what Indonesia and Australia – the primary exporters of coal to China right now – will do with their coal if rising U.S. exports take some of their business. And it is no less important to understand who else might want U.S. coal; even if China has inelastic demand, that doesn’t mean that India, for instance – another major importer of coal – can be characterized the same way. At this point, we still don’t know all the answers.
Image Credit: Peabody Energy, Inc. via Wikimedia Commons