A Welfare Analysis of Reducing Coal Production: Evidence from China

Abstract: We examine the impact of a large but short-lived industrial policy in China. In 2016, major coal-producing provinces in China, the world’s largest producer and consumer of coal, reduced coal mining capacity by 16%, triggering a 60% price surge. We estimate a parsimonious model of China’s coal demand and supply to quantify the impact of the policy. We find that the policy reduces domestic sales by $30.7 billion and results in large welfare transfer from the demand to the supply side, but imports and inventory offset the domestic sales decrease and there is little change in consumption or emission.