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State Action and Coal Prices (Wonky)

Robert Semple writes convincingly that gas prices are not set by Presidents, but are set in a global market, and that they are beyond the control of any one country.  As Dean Baker pointed out last week,  “Oil prices in the United States depend on the world market, not just supply and demand in the United States.”

This got me thinking about coal prices and state policy action – for example, how West Virginia’s severance tax on coal might influence the domestic price of coal.

The chart below shows spot market coal prices (2009 dollars) for the five coal regions – Central Appalachia, Northern Appalachia, Illinois Basin, Uintah Basin (CO and UT), and the Powder River Basin in Wyoming. As the chart indicates, coal prices, similar to gas prices in this chart by Semple, tend to rise and fall in the same pattern throughout the country. (The prices differences between Appalachia and other coal regions largely reflect the higher grade coal  – such as metallurgical coal – and the cheaper domestic transportation costs found in Appalachia.)

If Semple’s logic applies equally to coal prices as it does gas prices, than coal prices appear not to be heavily influenced by specific state tax policies, such as a severance tax, but are set regionally. 

If state severance taxes DID play a large role in the price, than it should be reflected in the price of electricity. One way to gauge this assumption is by looking at the average retail electricity costs in West Virginia, a state with a 5% severance tax on coal, and Pennsylvania, a state without a severance tax. According to the US Energy Information Administration, the average retail price of electricity was $9.48 per kilowatt-hour in West Virginia compared to $13.28 in Pennsylvania in December 2011. In Ohio, another state without a severance tax, it was $10.96 per kilowatt-hour. So, it appears that the state’s high tax burden on coal is not reflected in electricity prices.

So, if we assume that the severance tax in West Virginia is not being passed along in the form of higher electricity prices since the prices are put together in a competitive market of demand and supply, than who pays the severance tax?  Much like the discussion about who pays the federal corporate income tax, the argument with the most support is that the tax falls on the owners, or the coal producers in this case. Because most coal producers/stock owners live out of West Virginia, this could be a very exportable tax. Production taxes also tend to be highly inelastic, meaning that changes in tax rates have little affect on production. This is probably because taxes are small part of the costs and are not part of the price-setting mechanism.

If these assumptions are correct, than it gives support to the idea of placing an additional one-percent severance tax on coal to fuel economic diversification.

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