Welfare Effects of Reducing Coal Production in China

Abstract

We study the short-run welfare effects of reducing coal production in China. We leverage a 2016 policy that temporarily reduced coal supply to estimate an equilibrium model of the coal market. In the counterfactual simulation, we find that the policy decreases the equilibrium quantity by 20.1% and consumer surplus by 170.7 billion RMB, resulting in a deadweight loss of 97.1 billion RMB. The loss is an order of magnitude greater than the health cost savings attributed to reduced air pollutants. A Pigouvian tax internalizing the health costs of air pollution would reduce the quantity by 5.8% during the policy period.