The Secondary Benefits of Market-Based Environmental Regulation: The Case of Scrubbers

Title IV of the 1990 Clean Air Act Amendments (CAAA) introduced market-based incentives for controlling sulfur dioxide (SO2) emissions from coal burning power plants. Previous regulation under the 1977 CAAA had effectively required the use of scrubbers, but only by new power plants. The 1990 CAAA forced scrubbers to compete with other SO2 abatement options but also implemented emissions regulations for all power plants, thereby increasing the number of possible customers. While market-based incentives are widely believed to have lowered control costs, a secondary benefit would exist if this increased competition and potential demand reduced scrubbing costs by generating advancements in scrubber technology. To investigate this, we separate scrubbers by the regulatory regime in place when they were installed. A hedonic model is used to estimate the effect of changing regulatory regimes on the real capital (the purchase price) and operating costs of scrubbers. We find that while scrubbers installed under the 1990 CAAA are cheaper to purchase and operate than those installed under any other regulatory regime, these cost reductions seem to be a one-time drop rather than a continual decline.