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

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  • 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.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm437.

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Date of creation: 10 Dec 2003
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Handle: RePEc:ysm:somwrk:ysm437

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Web page: http://icf.som.yale.edu/
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Keywords: market-based instruments; prescriptive regulation; environmental policy; pollution control; sulfur dioxide; electric power; cost savings;

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Cited by:
  1. 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.
  2. Gabriel Chan & Robert Stavins & Robert Stowe & Richard Sweeney, 2012. "The SO2 Allowance Trading System and the Clean Air Act Amendments of 1990: Reflections on Twenty Years of Policy Innovation," NBER Working Papers 17845, National Bureau of Economic Research, Inc.
  3. Richard Schmalensee & Robert N. Stavins, 2012. "The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment," Working Papers 2012.60, Fondazione Eni Enrico Mattei.
  4. 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 103-22, Winter.
  5. Burtraw, Dallas & Szambelan, Sarah Jo, 2009. "U.S. Emissions Trading Markets for SO2 and NOx," Discussion Papers dp-09-40, Resources For the Future.
  6. 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.
  7. Chan, Hei Sing & Li, Shanjun & Zhang, Fan, 2013. "Firm competitiveness and the European union emissions trading scheme," Policy Research Working Paper Series 6662, The World Bank.

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