March 1, 2017

Trump Can't Save Coal

Adam Millsap

Senior Affiliated Scholar
Summary

Government shouldn’t determine which industries succeed or fail, so Trump’s broad plan to eliminate unnecessary regulations that increase costs and put firms in certain industries at a disadvantage is laudable. This should lead to more economic growth and more jobs overall but it won’t save every industry, and coal appears to be one of the industries on its way out.

Last night President Trump gave his first address to a joint session of Congress. His one-hour speech covered a variety of topics, including health care, taxes, immigration and a call for more infrastructure and military spending. He also reiterated his campaign promise to cut regulation, and specifically mentioned the coal industry as a beneficiary of this effort:

"We have undertaken a historic effort to massively reduce job‑crushing regulations, creating a deregulation task force inside of every Government agency; imposing a new rule which mandates that for every 1 new regulation, 2 old regulations must be eliminated; and stopping a regulation that threatens the future and livelihoods of our great coal miners."

Trump’s one-in-two-out regulation rule is similar to a successful effort to cut red tape in British Columbia, Canada and it has the potential to help the U.S. economy overall. As for coal, many people have argued that regulations from the EPA and other government agencies are coal’s biggest threat, and thus reducing regulation will spark a coal revival.

Government regulation has certainly hurt the coal industry, but regulation is not the only thing that damages an industry. Competition from other firms, Joseph Schumpeter’s creative destruction, can also reduce profits, production and employment. In coal’s case, the rise of fracking and natural gas has also played a significant role.

From 2001 to 2011 employment in the coal industry increased slightly as shown below. But since 2011 coal employment has declined nationwide and in the three states with the most coal employees—West Virginia, Kentucky and Pennsylvania. In 2015 these three states accounted for 47% of total private employment in the coal industry.

2012 report from the Heritage Foundation blames regulation for a lot of coal’s recent troubles, and there were some costly regulations imposed on the coal industry during Obama’s time as president. Trump recently overturned one of these regulations and there is evidence that it will save some jobs, though perhaps not as many as he and others claim.

But coal must also be able to compete with alternative sources of energy, and lately natural gas has provided more value for consumers. The figure below shows that the real price of natural gas is at its lowest level since 1997.

Another analysis from Bloomberg shows that the price of producing power from natural gas relative to coal fell dramatically after 2009 and has remained low since. Additionally, this relative price decline is largely due to the price of natural gas falling, not the price of coal rising. This price decline also matches up with the decline in coal mining employment shown earlier—evidence that competition from natural gas is at least partly responsible.

The increased use of natural gas doesn’t appear to be waning, either. According to the U.S. Energy Information Administration, electricity generation from natural gas (33%) caught up to electricity generation from coal (33%) in 2015. As recently as 2000 natural gas was responsible for only about 15% of the nation’s energy while coal was responsible for approximately 50%.  The current parity between the two is the result of a trend that began in the late 1990s, before the most recent regulations.

Eliminating some of the burdensome regulation placed on the coal industry will make it easier for coal to compete with natural gas and other forms of energy, but it doesn’t guarantee success since market forces are also working against coal. And given the evidence, it is unlikely that anything Trump does is going to drastically improve coal's future.

It’s also not clear that revitalizing the coal industry is the best thing to do for the people of West Virginia, Kentucky and Pennsylvania. In fact, coal could be part of the problem since the presence of relatively high-paying jobs in the coal industry that don’t require much formal schooling discourages educational attainment. Research shows that coal-producing counties have lower levels of education than non-coal counties and that this has had a negative impact on long-run economic growth in these areas.

Many people in West Virginia, Kentucky, Pennsylvania and other areas have been hit hard by coal’s decline, so it’s understandable that Trump and other politicians want to do something to help. But in a market economy some industries are always going to be shrinking while others are expanding: In this case it’s coal and natural gas. This creative destruction is essential for economic growth, so it’s important for us to accept and adjust to changes in the economy, even when they are painful in the short run.

That being said, government shouldn’t determine which industries succeed or fail, so Trump’s broad plan to eliminate unnecessary regulations that increase costs and put firms in certain industries at a disadvantage is laudable. This should lead to more economic growth and more jobs overall but it won’t save every industry, and coal appears to be one of the industries on its way out.