Non-Separable Pollution Control: Implications for a CO2 Emissions Cap and Trade System

36 Pages Posted: 27 Jan 2013 Last revised: 20 Nov 2015

See all articles by Mark D. Agee

Mark D. Agee

Pennsylvania State University

Scott Atkinson

University of Georgia

Thomas D. Crocker

University of Wyoming - College of Business - Department of Economics and Finance

Jonathan W. Williams

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: December 29, 2012

Abstract

The federal government now confronts considerable political pressure to add CO2 to the existing set of criteria air pollutants. As with current criteria pollutants, proposals call for control of CO2, assuming that the control of the each of the three criteria pollutants is separable from the others. However, control of CO2, SO2, and NOX emissions is most appropriately viewed as joint rather than separable based on engineering relationships. Empirically, we also find considerable jointness. Using a 10 year panel for 77 U.S. electric utilities, which comprise the largest sector in terms of energy-related CO2 emissions, we estimate a multiple-input, multiple-output directional distance function combining good inputs (production capital, pollution control capital, labor, and energy) and a bad input (sulfur burned) to produce good outputs (residential and industrial/commercial electricity production) and bad outputs (SO2, NOX, and CO2). We find that while utilities do not directly control CO2 emissions, considerable jointness exists across SO2, NOX, and CO2 emissions. Failure to account for this jointness increases the cost of pollution control, making it less acceptable to the public and its policymakers and implying that the marginal cost of controlling each of multiple pollutants within and across U.S. electric power plants will not be equated. We also compute the technical efficiency of our set of utilities and find that considerable cost savings can be achieved by adopting the best technology for production of electricity and reduction of pollutants.

Keywords: U.S. electric power generation, CO2, SO2, NOX emissions, efficient cap and trade system design, directional distance function, technical change

JEL Classification: Q48, Q53, D24, O33

Suggested Citation

Agee, Mark D. and Atkinson, Scott and Crocker, Thomas D. and Williams, Jonathan W., Non-Separable Pollution Control: Implications for a CO2 Emissions Cap and Trade System (December 29, 2012). Resource and Energy Economics, Vol. 36, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2201652 or http://dx.doi.org/10.2139/ssrn.2201652

Mark D. Agee

Pennsylvania State University ( email )

Altoona, PA 16601-3760
United States
814-949-5267 (Phone)
814-949-5547 (Fax)

Scott Atkinson (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

Thomas D. Crocker

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States

Jonathan W. Williams

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

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