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

68 Pages Posted: 1 Aug 2022 Last revised: 10 Jun 2023

See all articles by Gautam Gowrisankaran

Gautam Gowrisankaran

Columbia University; HEC Montreal; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Ashley Langer

University of Arizona

Wendan Zhang

Renmin University of China

Date Written: July 2022

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.

Suggested Citation

Gowrisankaran, Gautam and Langer, Ashley and Zhang, Wendan, Policy Uncertainty in the Market for Coal Electricity: The Case of Air Toxics Standards (July 2022). NBER Working Paper No. w30297, Available at SSRN: https://ssrn.com/abstract=4177544

Gautam Gowrisankaran (Contact Author)

Columbia University ( email )

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HEC Montreal ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

National Bureau of Economic Research (NBER) ( email )

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Ashley Langer

University of Arizona ( email )

Wendan Zhang

Renmin University of China ( email )

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Beijing, 100872
China

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