Public concern about the environment and sustainable energy is escalating; however, the United States remains dependent on fossil fuels for approximately 62% of its overall energy generation. A shift to alternative energy sources is underway, but the transition is slow. The slow pace is linked to the high level of political influence the coal industry has on energy policy in the United States through lobbying groups. Despite the environmental and social concerns, policymakers remain hesitant to implement measures against the coal industry. Changes in policy to industries like coal can significantly impact their success and dominance over energy production.
Lobbying groups for the coal industry spend millions of dollars each year to maintain regulations that financially benefit the industry. These regulations include tax breaks, below-market leases, and reduced accountability for the social costs inflicted by greenhouse gas emissions. Studies suggest that increasing taxes on fossil fuels is a low-cost option to reduce greenhouse gas emissions and protect consumers. Despite this data, the Trump administration’s policies favored decreasing regulations and increasing US consumption of fossil fuels. One important policy decision was to significantly reduce the excise tax on coal beginning at the start of 2019. The excise tax is a federal tax paid by coal producers when the coal is first sold or used. This tax was implemented first in 1978 with the Black Lung Revenue Act to reduce coal use and provide aid to coal miners affected by Black Lung Disease. The original tax level in 1978 was 50 cents per ton for underground coal and 25 cents per ton for surface coal. In 1986, the tax was increased to $1.10 per ton for underground coal and 55 cents for surface coal. At the start of 2019, the tax was relaxed to the pre-1986 level. Then, in December of 2019, the tax level was raised back to the 2018 level.
To understand the effect of policy changes on the coal industry, specifically the reduction in excise tax during 2019, the researcher measured the changes in stock prices of various coal firms or indices over the year-long period. In evaluating policy, measuring changes in stock prices is informative. The data quickly reflects how investors feel about changes that impact the market. The researcher noted price changes to the Dow Jones U.S. Coal Index to analyze the effects of the tax reduction. Three control groups were selected: United States Oil Fund, United States Natural Gas Fund, and Dow Jones Industrial Average. Together, they provide a valid baseline for what would have happened to the Dow Jones U.S. Coal Index without the tax reduction.
The results indicate a significant increase in the Dow Jones U.S. Coal Index price compared to the control groups during the 2019 period when the excise tax was reduced. More specifically, the stock price of coal increased by as much as 72.6% compared to the control stocks. Based on the findings, the total value of coal stocks saw a 2.21 billion dollar increase compared to the value of the tax reduction. While the shareholders benefit from the stock price increase, the data reveals the public’s increased confidence in the coal industry and its ability to continue producing profits.
This study provides important insight into how changes in taxes affect the coal industry. Policy changes inevitably affect industries, like coal production, in profit and production regulations. In tandem with market analysis, policy analysis is a practical approach to analyzing the reducing activities that negatively impact the environment. The reduction in excise taxes is related to a period of increased public confidence in the coal industry, which ultimately slows down the transition from coal to more environmentally friendly energy alternatives. Fossil fuels are a dangerous contributor to climate change, and policy changes like tax reductions to the coal industry can hinder the transition to sustainable and alternative methods of energy production.
Garrett Shost (pictured below) is a graduate from the College of Social Sciences at Florida State University. This post is a summary of Garrett’s honors thesis, written by COSSPP Blog Intern Dara Begley. You can learn more about Garrett here. You can learn more about this project here.