Thursday, August 23, 2012

Deregulation Of Railroad Freight Shipment Prices Lowered Shipment Costs, Increased The Use Of Western Low Sulfur Coal In The Eastern US And Substantially Lowered SO2 Emissions Prior To Clean Air Mandates

The Interstate Commerce Commission, a US regulatory body, had legal power to set railroad and truck freight rates. Among its goals, the Commission was authorized to set shipment rates that were fair and to prevent rate discrimination based on long or short hauls. The effect was to keep freight rates artificially high.

Although, the cheapest to mine coal also had the lowest sulfur content, it was in Montana and Wyoming. The major electrical plant users of coal were on the East Coast and the east side of the Mississippi River. The high railroad freight rates set by the ICC made it economically unattractive for Eastern power plants to use low sulfur coal from the West.

The deregulation of freight railroad shipment rates in the late 1970s and early 1980s, allowed competitive pricing and significantly lowered freight shipment rates. The lowered rates allowed Eastern power plants to obtain low sulfur economically and to use it. The coal powered electrical plants use of the low sulfur coal substantially lowered the SO2 emissions into the air years before the government mandated SO2 emissions program went into effect.

From NBER Working Paper Series, "The SO2 Allowance Trading System: The Ironic History Of A Grand Policy Experiment" by Richard Schmalensee and Robert Stavins, Working Paper 18306:
The three major coal deposits in the United States are located in the Powder River Basin (PRB), the Illinois Basin and Central Appalachia. Of these, PRB coal [in southeast Montana and northeast Wyoming] is cheapest to mine and has the lowest sulfur content, though considerable low-sulfur coal was also produced in the East, particularly after the acid rain program took effect. Hence, absent the use of any abatement technology, switching from high-sulfur eastern coal to low-sulfur coal, particularly PRB coal, reduces power plant SO2 emissions per unit of electricity generation.

The majority of coal-fired power plants in the United States are located along or east of the Mississippi River, making PRB the most distant option for major sources of demand. As freight prices fell with deregulation, liberalization gave freight carriers flexibility and incentive to contract with eastern utilities, and these same utilities developed low-cost ways to modify their boilers (which were designed to burn bituminous coal) to burn sub-bituminous PRB coal (Ellerman et al 2000, pp. 243-45). The average sulfur content of coal burned at electric generating units began to fall. In fact, SO2 emissions at units covered by the allowance-trading program were actually falling from 1985 to 1993, before the acid rain program took effect (Ellerman and Montero 1998). The main source of this decline was the increased use of PRB coal, with average rail rates of shipping PRB coal to Midwest generators falling by over 50 percent from 1979 to 1993 (Gerking and Hamilton 2008). [Emphasis added.]

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