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"Second-Best" Adjustments to Externality Estimates in Electricity Planning with Competition

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  • Dallas Burtraw
  • Karen Palmer
  • Alan J. Krupnick

Abstract

Some public utility commissions use monetary place-holders to reflect externality values in the financial evaluation of utility investments. This approach can be justified as a "second-best" policy tool if existing environmental regulation can be taken as given. This paper addresses two possible unintended consequences of this policy: the effect on the price-marginal cost gap and the potential substitution towards unregulated generation. We compute a "second-best adder" to correct for externalities in electricity planning in three regional case studies using a normative model of economic efficiency. Such adders are found to differ from externality estimates by 10-20 percent or more.

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Bibliographic Info

Article provided by University of Wisconsin Press in its journal Land Economics.

Volume (Year): 73 (1997)
Issue (Month): 2 ()
Pages: 224-239

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Handle: RePEc:uwp:landec:v:73:y:1997:i:2:p:224-239

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References

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  1. John Tschirhart, 1994. "On the Use of 'Adders' by Public Utility Commissions," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 121-128.
  2. Jorgenson, Dale W. & Wilcoxen, Peter J., 1990. "Intertemporal general equilibrium modeling of U.S. environmental regulation," Journal of Policy Modeling, Elsevier, Elsevier, vol. 12(4), pages 715-744.
  3. Daniel E. Dodds & Jonathan A. Lesser, 1994. "Can Utility Commissions Improve on Environmental Regulations?," Land Economics, University of Wisconsin Press, University of Wisconsin Press, vol. 70(1), pages 63-76.
  4. Joskow, Paul L., 1992. "Weighing environmental externalities: Let's do it right!," The Electricity Journal, Elsevier, Elsevier, vol. 5(4), pages 53-67, May.
  5. Burtraw Dallas & Harrington Winston & Krupnick Alan J. & Freeman III A. Myrick, 1995. "Optimal Adders for Environmental Damage by Public Utilities," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S1-S19, November.
  6. Oates, Wallace E. & Strassmann, Diana L., 1984. "Effluent fees and market structure," Journal of Public Economics, Elsevier, Elsevier, vol. 24(1), pages 29-46, June.
  7. Jorgenson, Dale W & Slesnick, Daniel T & Stoker, Thomas M, 1988. "Two-Stage Budgeting and Exact Aggregation," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 6(3), pages 313-25, July.
  8. Bernow, Stephen & Biewald, Bruce & Marron, Donald, 1991. "Full-cost dispatch: Incorporating environmental externalities in electric system operation," The Electricity Journal, Elsevier, Elsevier, vol. 4(2), pages 20-33, March.
  9. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, American Economic Association, vol. 59(1), pages 174-77, March.
  10. Karen Palmer & Alan Krupnick & Hadi Dowlatabadi & Stuart Siegel, 1995. "Social Costing of Electricity in Maryland: Effects on Pollution, Investment, and Prices," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 1-26.
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Cited by:
  1. Burtraw, Dallas & Krupnick, Alan J., 1996. "The second-best use of social cost estimates," Resource and Energy Economics, Elsevier, Elsevier, vol. 18(4), pages 467-489, December.
  2. Vennemo, Haakon & Halseth, Arve, 2001. "Environmental regulation of a power investment in an international market," Resource and Energy Economics, Elsevier, Elsevier, vol. 23(2), pages 157-173, April.
  3. Donald N Dewees, 2006. "Pollution and the Price of Power," Working Papers, University of Toronto, Department of Economics tecipa-246, University of Toronto, Department of Economics.
  4. Spencer Banzhaf, H. & Burtraw, Dallas & Palmer, Karen, 2004. "Efficient emission fees in the US electricity sector," Resource and Energy Economics, Elsevier, Elsevier, vol. 26(3), pages 317-341, September.
  5. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc.

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