Sulfur Dioxide Control by Electric Utilities: What are the Gains from Trade?

Posted: 26 Mar 2001

See all articles by Curtis Carlson

Curtis Carlson

National Oceanic and Atmospheric Administration

Dallas Burtraw

Resources for the Future

Maureen Cropper

University of Maryland - Department of Economics; Resources for the Future

Karen L. Palmer

Resources for the Future

Abstract

Title IV of the 1990 Clean Air Act Amendments (CAAA) established a market for transferable sulfur dioxide (SO2) emission allowances among electric utilities. This market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit SO2 from firms with lower costs, and this is expected to yield cost savings compared to a command-and-control approach to environmental regulation. This paper uses econometrically estimated marginal abatement cost functions for power plants affected by Title IV of the CAAA to evaluate the performance of the SO2 allowance market. Specifically, we investigate whether the much-heralded fall in the cost of abating SO2, compared to original estimates, can be attributed to allowance trading. We demonstrate that, for plants that use low-sulfur coal to reduce SO2 emissions, technical change and the fall in prices of low-sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985. The flexibility to take advantage of these changes is the main source of cost reductions, rather than trading per se. In the long run, allowance trading may achieve cost savings of $700-$800 million per year compared to an "enlightened" command-and-control program characterized by a uniform emission rate standard. The cost savings would be twice as great if the alternative to trading were forced scrubbing. However, a comparison of potential cost savings in 1995 and 1996 with actual emissions costs suggests that most trading gains were unrealized in the first two years of the program.

Suggested Citation

Carlson, Curtis and Burtraw, Dallas and Cropper, Maureen L. and Palmer, Karen, Sulfur Dioxide Control by Electric Utilities: What are the Gains from Trade?. Journal of Political Economy, Vol. 108, No. 6, December 2000. Available at SSRN: https://ssrn.com/abstract=248522

Curtis Carlson

National Oceanic and Atmospheric Administration ( email )

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Dallas Burtraw

Resources for the Future ( email )

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Washington, DC 20036
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Maureen L. Cropper (Contact Author)

University of Maryland - Department of Economics

College Park, MD 20742
United States

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Karen Palmer

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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