Blog Post

Would Coal Exports Reduce Emissions?

Jan 22, 2013 | Nathan Richardson

Persistent low natural gas prices and, to some extent, EPA regulation are driving fuel switching from coal to gas in the electric power sector, reducing domestic demand for U.S. coal. The U.S. already exports a lot of coal, but the trend toward gas has led some firms to more aggressively pursue export markets. Increasing exports, particularly to Asia, would require new shipping facilities. Construction of such facilities, and coal exports in general, are opposed by environmentalists on the grounds that they will lead to more coal being burned, with local pollution impacts here and abroad and increased global GHG emissions. The argument is simple - if you sell the coal you are no longer burning in the U.S. abroad, it will be burned there and you're back where you started in emissions terms (or worse, once you consider the GHG impacts of natural gas and of transporting the coal).

Setting aside the issue of who is responsible for emissions from exported coal, is this view right? Stanford economics professor Frank Wolak (or, more accurately, writer Mark Golden reporting his views) argues that it isn't, and that exporting U.S. coal could reduce global GHG emissions.

Wolak's argument is, first, that Chinese coal demand should be treated as fixed given the country's big investments in new coal plants - whether the U.S. exports more or not, China will burn a lot of coal. Second, exports will drive up the domestic coal price, accelerating the switch to gas. Together, this means lower U.S. GHG emissions, the same Chinese emissions and, by the way, economic gains for the U.S. as our trade deficit with China is reduced.

Wolak might be right, but I think the effects of U.S. coal exports on global emissions are more complex than his argument lets on, at least as it's summarized in the article. His point that China is probably unable to substitute away from coal the way the U.S. can is well taken, and though others disagree, it's a stated assumption. If true, this means that Chinese coal demand won't go down. But it doesn't say anything about whether it can go up. Though China's energy mix is dominated by coal, it isn't all coal. Access to cheaper coal on world markets might lead China to rely on coal even more heavily, substituting away from existing or future hydro, nuclear, or renewables. Or it might allow faster Chinese economic growth - nothing wrong with that, of course, but such growth would increase energy demand and, presumably, the amount of coal burned. Moreover, even if coal prices don't affect China's energy mix, they certainly affect China's incentives to use the coal it burns more efficiently. Efficiency improvements at existing plants that would otherwise be made might not occur if U.S. exports lead to lower prices.

But even if you accept the assumption that Chinese coal demand is truly fixed, other effects might lead to greater emissions, or reduce the beneficial effects in the U.S. For example, exports might not raise U.S. coal prices very much if the U.S. coal supply curve is relatively flat, meaning no extra incentive to switch to gas. Also, China is the largest but far from the only coal importer, and holding its consumption constant doesn't mean we can do the same globally. Europe (so far) lacks significant domestic gas supplies, but imports a lot of gas from Russia and elsewhere. Cheaper coal might affect the coal/gas equilibrium there, especially in Germany given its decision to abandon nuclear energy. There is evidence that this is already happening. Maybe some marginal coal producers would be unable to compete with U.S. exports, but I doubt it. Coal mines and export facilities are large capital expenditures with high sunk costs. International coal shipping emissions need to be counted too, though they are probably small compared to effects on the global energy mix.

So who is right - environmentalists who see coal exports as 100% additional emissions, or Wolak, who argues that they will reduce global emissions? I don't think either view is correct, since both assume away or ignore important factors. The slope of the U.S. coal supply curve, the elasticity of demand for coal in China and the rest of the world, future U.S. natural gas price trends, and the question of future U.S. gas exports (with effects on U.S. and global prices) are all significant. There are almost surely others I haven't considered. I don't know what many of those look like today, much less in the future. Wolak is correct to observe that there are effects of coal exports that tend to reduce emissions, and that these effects are often ignored or underplayed by export critics. But there are more effects in the other direction than he discusses - by assuming Chinese consumption will not change and ignoring the rest of the world, he can focus on U.S. effects. But this is an oversimplification (as is the environmentalist position, to the extent it does not confront Wolak's point about domestic price trends).  More study is needed that considers all of the relevant effects and related uncertainty.

As always, if we had a carbon price we wouldn't have to worry about this question since incentives to switch away from coal would be in place already. But it would have to be a global price - otherwise coal exports to countries without a price would "leak" carbon emissions and undermine the effect of the price.