Policy Uncertainty in the Market for Coal Electricity: The Case of Air Toxics Standards

Abstract

Government policy uncertainty affects irreversible decisions including technology adoption and exit. This paper quantifies uncertainty surrounding the Mercury and Air Toxics Standard (MATS). We estimate a dynamic oligopoly model for coal-fired electricity generators that recovers generators' beliefs regarding future MATS enforcement. We develop the Approximate Belief Oligopoly Equilibrium concept where players understand that their decisions impact aggregate market states. MATS enforcement created substantial uncertainty: the perceived enforcement probability dropped to 43%. Resolving uncertainty early would increase profits by $1.39 billion but also pollution costs by $0.652–1.776 billion. Had exit been unlikely, resolving uncertainty early would have decreased pollution.