Cost Savings, Market Performance and Economic Benefits of the U.S. Acid Rain Program

This paper reports on four areas of research concerning Title IV of the 1990 Clean Air Act Amendments that regulates emissions of SO2 from electricity generation. The first is the costs of the program over the long-run as estimated from the current perspective taking into account recent changes in fuel markets and technology. We compare projected costs with potential cost savings that can be attributable to formal trading of emission allowances. The second area is an evaluation of how well allowance trading has worked to date. The third area is the relationship between compliance costs and economic costs from a general equilibrium perspective. The fourth area is a comparison of benefits and costs for the program.

Innovation Under the Tradable Sulfur Dioxide Emission Permits Program in the U.S. Electricity Sector

The 1990 U.S. Clean Air Act Amendments (CAAA) instituted a national program in tradable sulfur dioxide (SO2) emission permits, referred to as "emission allowances," in the U.S. electricity sector. This paper provides a survey and assessment of the SO2 allowance trading program with a focus on the role of innovation. Over the last decade the cost of compliance has fallen dramatically compared with most expectations, and today the total cost of the program is 40– 140% lower than projections (depending on the timing of those projections and the counter-factual baseline considered). Marginal costs of reductions are less than one-half the cost considered in most analyses at the time the program was introduced. Innovation accounts for a large portion of these cost savings, but not as typically formulated in economic models of research and development (R&D) efforts to obtain patent discoveries. Innovation under the SO2 allowance trading program involves organizational innovation at the firm, market and regulatory level and process innovation by electricity generators and upstream fuel suppliers. An important portion of the cost reductions that are evident was already in the works prior to and independent of the program. Nonetheless, the allowance trading program deserves significant credit for providing the incentive and flexibility to accelerate and to fully realize exogenous technical changes that were occurring in the industry. This marks a significant departure from conventional approaches to environmental regulation, which would not be expected to capture these savings. The ongoing transition to restructuring of electricity markets and expanding competition in electricity generation complements the design of the SO2 allowance trading program by providing firms with full incentives to reduce costs of pollution control.

Cost Savings sans Allowance Trades? Evaluating the SO2 Emission Trading Program to Date

Title IV of the 1990 amendments to the Clean Air Act initiated a historic experiment in incentive-based environmental regulation through the use of tradable allowances for emission of sulfur dioxide by electric generating facilities. To date, relatively little allowance trading has taken place; however, the costs of compliance have been much less than anticipated. The purpose of this paper is to address the apparent paradox that the allowance trading program may not require (very much) trading to be successful. Title IV represented two great steps forward in environmental regulation: first a move toward performance standards and second formal allowance trading. The first step has been sufficient to date for improving dynamic efficiency and achieving relative cost-effectiveness.

State Efforts to Cap the Commons: Regulating Sources or Consumers?

California’s Global Warming Solutions Act (Assembly Bill 32) requires the state to reduce aggregate greenhouse gas emissions to 1990 levels by 2020. One of the challenges California faces is how the state should regulate the electricity sector. About 80 percent of the state’s electricity consumption is generated in the state, but about 52 percent of the greenhouse gas emissions associated with electricity consumption comes from outside the state. The question addressed in this paper is where to locate the point of compliance in the electricity sector—that is, where in the supply chain linking fuel suppliers to generators to the transmission system to retail load-serving entities should the obligation for measurement and compliance be placed. The conclusion offered is that one particular approach to regulating the electricity sector—the “first-seller approach”—would be best for California. The alternative “load-based approach” has a running head start in the policy process but would undermine an economywide marketbased emissions trading program.electricity, climate, state level, CO2, cap and trade, market-based approaches, load-based, first seller, point of regulation, California, Western Climate Initiative

SO2 Allowance Trading: How Experience and Expectations Measure Up

The SO2 trading program has achieved reductions in emissions ahead of schedule, with allowance prices below the marginal costs that were anticipated for the program. This paper explores the experience with the program and proposes a taxonomy of reasons why allowance prices are low. The overarching reason is that the most costly investments to accommodate full emission reductions have been successfully delayed. Application of a discount rate to these long run marginal costs yields an estimate of allowance price close to that observed today. Several factors have contributed to the delay in bearing these costs, and helped to reduce their magnitude. One group of factors stems from market fundamentals, especially the cost of rail transport of low sulfur coal. A second group includes the influences of state and federal regulators. A third group includes distinctions from the "imagined" program compared to that which was actually been enacted.

The Evolution of NOx Control Policy for Coal-Fired Power Plants in the United States

Emissions of nitrogen oxides (NOx ) contribute to formation of particulate matter and ozone, and also to acidification of the environment. The electricity sector is responsible for about 20% of NOx emissions in the United States, and the sector has been the target of both prescriptive (command-and-control) and flexible (cap-and-trade) approaches to regulation. We summarize the major NOx control policies affecting this sector, and provide some perspectives as to their effectiveness. While both prescriptive and flexible approaches continue to play an important role, significant new proposals have wholly embraced a cap-and-trade approach.emissions trading, cap and trade, air pollution, cost-benefit analysis, electricity, particulates, ozone, nitrogen oxides, acid rain

The Second-Best Use of Social Cost Estimates

A significant literature has developed to estimate the damages to third parties from new electricity generation technologies. This paper focuses on how such estimates can be profitably used in the present regulatory environment, and in the potential new environment that may result from restructuring in the electricity industry.

Cost-Effectiveness of Renewable Electricity Policies

We analyze policies to promote renewable sources of electricity. A renewable portfolio standard raises electricity prices and primarily reduces gas-fired generation. A “knee” of the cost curve exists between 15% and 20% goals for 2020 in our central case, and higher natural gas prices lower the cost of greater reliance on renewables. A renewable energy production tax credit lowers electricity price at the expense of taxpayers and thus limits its effectiveness in reducing carbon emissions; it also is less costeffective at increasing renewables than a portfolio standard. Neither policy is as cost-effective as a capand-trade policy for achieving carbon emissions reductions.renewable energy, electricity, renewable portfolio standard, carbon dioxide

Clean Air For Less: Exploiting Tradeoffs Between Different Air Pollutants

The Administration's Clear Skies initiative and all competing legislative proposals take a pollutant-by-pollutant approach to address air pollution problems caused by emissions of both nitrogen oxides (NOx) and sulfur dioxide (SO2). Randall Lutter and Dallas Burtraw argue that as a result they miss an important opportunity to cut compliance costs without reducing expected environmental protection. For a scenario where firms could use permits to emit three tons of NOx instead of one ton of SO2, we estimate that compliance costs would fall by more than $1 billion per year relative to emissions caps like those in Clear Skies. Yet expected environmental damages would not increase because the projected damages from three tons of NOx are roughly the same as from one ton of SO2. To ensure that new air pollution legislation is cost-effective, Congress should allow firms to exchange NOx and SO2 permits at a rate that reflects relative environmental damages.

The Benefits of Reduced Air Pollutants in the U.S. from Greenhouse Gas Mitigation Policies

Policies that reduce emissions of greenhouse gases can simultaneously alter emissions of conventional pollutants that have deleterious effects on human health and the environment. This paper first describes how these "ancillary" benefits—benefits in addition to reduced risks of climate change—can result from greenhouse gas (GHG) mitigation efforts. It then discusses methodologies for assessing ancillary benefits and provides a critical review of estimates associated with reductions of criteria air pollutants. We find that these benefits in the U.S. may be significant, indicating a higher level of "no regrets" greenhouse gas abatement than might be expected based on simple economic calculations of abatement cost. However, the magnitude of ancillary benefits realized by any program of GHG mitigation is highly dependent on the location, pollutant, degree of exposure, and the economic behavior of individuals in response to the program. It is also highly dependent on the interaction of GHG abatement policies with the policies used for regulating conventional pollutants. We identify a rule of thumb to suggest ancillary benefits could be on the order of 30 percent of the incremental cost of GHG mitigation. For modest carbon reduction that do not result in changes in emissions of sulfur dioxide by electric utilities, ancillary benefits may be as high as $7 per ton. Greater benefits could be obtained with larger GHG reductions, although the costs of abatement would also be much greater.