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ABATEMENT COST HETEROGENEITY IN PHASE I ELECTRIC UTILITIES

By JON REZEK and BENJAMIN F. BLAIR

Abstract

The market-based instruments embodied in the Acid Rain Program have been instrumental in the reduction of SO 2 and NO "x" emissions from electric utilities. Economic theory suggests that tradable pollution permit systems encourage polluters to reallocate pollution burdens to take advantage of any differences in marginal abatement costs. Such reallocations improve the efficiency of pollution reduction. This article evaluates the effectiveness of the first phase of the Acid Rain Program in achieving increased homogeneity of marginal abatement costs using an output distance function approach. The results indicate that plants have been successful in adapting to this more flexible regulatory framework. Copyright 2005 Western Economic Association International.

DOI identifier: 10.1093/cep-byi025
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