How clean is refined coal? An empirical assessment of a billion-dollar tax credit

US tax law provides nearly $1 billion annually in tax credits for refined coal, which is supposed to reduce local air pollution. Eligibility for the credit requires firms to demonstrate legally specified emissions reductions for three pollutants. Firms typically demonstrate eligibility through laboratory tests, but results from the lab can differ from those in practice. Using a nationally comprehensive boiler-level panel dataset, we find that emission reductions in practice are only about half of the levels required, and even then only arise when certain pollution controls are installed. We also show that the policy reduces social welfare, resulting in costs more than seven times the benefits, in part because of a rebound effect in which the subsidy increases coal use by extending the operational life of some coal plants. Because the tax credit is up for reauthorization in 2021, our work has immediate policy relevance. (c) 2020 Elsevier B.V. All rights reserved.

Automated summary

This study reveals that actual emission reductions from refined coal are only about half of the required levels and only arise when certain pollution controls are installed. The policy reduces social welfare and costs are more than seven times the benefits.