Economic impacts of debottlenecking congestion in the Chinese coal supply chain

- We develop a linear optimization model of China's coal sector.
- We estimate the congestion costs to be RMB 228 and 105 billion in 2011 and 2013.
- Debottlenecking coal transportation renders thermal coal imports uneconomical.
- We estimate the optimal infrastructure investments and returns on specific projects.
- The existing tariff structure retains economic efficiency of marginal cost pricing.

The fast pace of development in China's coal industry created bottlenecks in its transportation infrastructure. These bottlenecks likely affected not only China's domestic coal market, but also global coal markets. In this paper, we estimate the costs and consequences of these bottlenecks using a production and multimodal transportation model. We find that coal transportation inefficiencies increased the price of Chinese domestic coal at coastal locations and thereby influenced global seaborne coal prices. According to our model results, the resulting extra costs of coal supplied to the Chinese economy totaled 228 billion renminbi (RMB) in 2011 and 105 in 2013. The subsequent debottlenecking, on the other hand, has reduced the price of Chinese domestic coal delivered to coastal regions and contributed to the reduction in global seaborne coal prices since 2011. Our analysis also suggests that current tariffs for coal transport, with their embedded taxes to cover investments in rail capacity, result in economic efficiencies similar to charging marginal transportation costs and that planners have not introduced distortions that impose significant additional costs on the Chinese economy. Many projects that expanded transport capacity delivered strongly positive rates of return. However, some have poor or negative rates of return, which can reflect either overinvestment or preinvestment in future needs.