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What Did the Market Buy? Cost Savings Under the U. S. Tradeable Permits Program for Sulfur Dioxide

Author

Listed:
  • Nathaniel O. Keohane

    (School of Management)

Abstract
Title IV of the 1990 Clean Air Act instituted a nationwide system of tradeable pollution permits for sulfur dioxide emitted by electric power plants. This paper asks: What were the cost savings from using a market-based instrument, rather than a more conventional prescriptive approach? Using an econometric model of the decision whether or not to install a scrubber under different policy regimes, I simulate the decisions that would have been made under prescriptive regulation. I find that under an uniform emissions-rate standard chosen to achieve the same aggregate abatement as actually occurred, the total number of scrubbers would have been about one-third higher than under the baseline cap-and-trade program. The change in the distribution of scrubbers among units is more striking. Under prescriptive regulation, installed scrubbers would have had systematically higher scrubbing costs than they actually did, and would have been installed at plants with significantly higher costs of switching to low-sulfur coal (the principal alternative to scrubbing). At the aggregate level, these effects translate into aggregate costs of compliance that would have been greater than actual costs by an estimated $150 million to $270 million per year. Thus the use of the market-based instrument resulted in cost savings of between 16% and 25%. The results provide a concrete demonstration of the influence of policy design on both unit-level choices of abatement technique and aggregate abatement costs.

Suggested Citation

  • Nathaniel O. Keohane, 2003. "What Did the Market Buy? Cost Savings Under the U. S. Tradeable Permits Program for Sulfur Dioxide," Yale School of Management Working Papers ysm437, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm437
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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=465320
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    Citations

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    Cited by:

    1. Chan, Hei Sing (Ron) & Li, Shanjun & Zhang, Fan, 2013. "Firm competitiveness and the European Union emissions trading scheme," Energy Policy, Elsevier, vol. 63(C), pages 1056-1064.
    2. Robert C. Anderson & Richard D. Morgenstern, 2009. "Marginal abatement cost estimates for non-CO 2 greenhouse gases: lessons from RECLAIM," Climate Policy, Taylor & Francis Journals, vol. 9(1), pages 40-55, January.
    3. Stowe, Robert C & Stavins, Robert Norman & Chan, Gabriel Angelo & Sweeney, Richard Leonard, 2012. "The SO2 Allowance Trading System and the Clean Air Act Amendments of 1990: Reflections on Twenty Years of Policy Innovation," Scholarly Articles 8160721, Harvard Kennedy School of Government.
    4. Richard Schmalensee & Robert N. Stavins, 2019. "Policy Evolution under the Clean Air Act," Journal of Economic Perspectives, American Economic Association, vol. 33(4), pages 27-50, Fall.
    5. Burtraw, Dallas & Szambelan, Sarah Jo, 2009. "U.S. Emissions Trading Markets for SO2 and NOx," RFF Working Paper Series dp-09-40, Resources for the Future.
    6. Revesz, Richard & Stavins, Robert, 2004. "Environmental Law and Policy," Working Paper Series rwp04-023, Harvard University, John F. Kennedy School of Government.
    7. Ann Ferris & Ronald J. Shadbegian & Ann Wolverton, 2014. "The Effect of Environmental Regulation on Employment: An Examination of the 1990 Clean Air Act Amendments and its Impact on the Electric Power Sector," NCEE Working Paper Series 201403, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Feb 2014.
    8. Ann E. Ferris & Ronald J. Shadbegian & Ann Wolverton, 2014. "The Effect of Environmental Regulation on Power Sector Employment: Phase I of the Title IV SO2 Trading Program," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(4), pages 521-553.
    9. Richard Schmalensee & Robert N. Stavins, 2017. "Lessons Learned from Three Decades of Experience with Cap and Trade," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(1), pages 59-79.
    10. Richard Schmalensee & Robert N. Stavins, 2013. "The SO 2 Allowance Trading System: The Ironic History of a Grand Policy Experiment," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 103-122, Winter.
    11. Robert N. Stavins, 2020. "The Future of US Carbon-Pricing Policy," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 1(1), pages 8-64.
    12. Ian Lange & Allen Bellas, 2005. "Technological Change for Sulfur Dioxide Scrubbers under Market-Based Regulation," Land Economics, University of Wisconsin Press, vol. 81(4).
    13. Bartha, Zoltán & Sáfrányné Gubik, Andrea & Tóthné Szita, Klára, 2013. "Intézményi megoldások, fejlődési modellek [Institutional solutions, development models]," MPRA Paper 50901, University Library of Munich, Germany.
    14. Stavins, Robert N., 2019. "The Future of U.S. Carbon-Pricing Policy: Normative Assessment and Positive Prognosis," Working Paper Series rwp19-017, Harvard University, John F. Kennedy School of Government.
    15. Boisvert, Richard N. & Poe, Gregory L. & Sado, Yukako, 2007. "Selected Economic Aspects of Water Quality Trading: A Primer and Interpretive Literature Review," EB Series 121835, Cornell University, Department of Applied Economics and Management.
    16. Stavins, Robert, 2019. "The Future of United States Carbon-Pricing Policy," RFF Working Paper Series 19-11, Resources for the Future.

    More about this item

    Keywords

    market-based instruments; prescriptive regulation; environmental policy; pollution control; sulfur dioxide; electric power; cost savings;
    All these keywords.

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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