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.

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.

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.

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

Electricity Restructuring and Regional Air Pollution

This paper investigates the regional air pollution effects that could result from new opportunities for inter-regional power transmission in the wake of more competitive electricity markets. The regional focus is important because of great regional variation in the vintage, efficiency and plant utilization rates of existing generating capacity, as well as differences in emission rates, cost of generation and electricity price. Increased competition in generation could open the door to changes in the regional profile of generation and emissions. We characterize the key determinant of changes in electricity generation and transmission as the relative cost of electricity among neighboring regions. In general, low cost regions are expected to export power generated by existing coal-fired facilities to higher cost regions. The key determinant of how much additional power would be traded is the uncommitted electricity transfer capability between regions, including its possible future expansion. The changes in emissions of NOx and CO2 that result are modeled as a function of the average emission rate for each pollutant in each region, coupled with assumptions about the extent of displacement of nuclear or coal-fired generation in the importing regions. Finally, we employ an atmospheric transport model to predict the changes in atmospheric concentrations of in each region as a consequence of changes in generation for inter-regional transmission. In the year 2000, we estimate national emission changes for NOx could increase by 213,000 to 478,900 tons under the scenarios we think most likely, compared to the baseline. Under our benchmark scenario, we find national emissions of NOx would increase by 349,900 tons. The changes in NOx emissions should be considered in the context of an expected decrease in annual emissions nationally of over 2 million tons that will result from full implementation of the 1990 Clean Air Act Amendments over the next few years. The increase in emissions that we estimate serve to undo a small portion of the expected improvement in air quality that would occur otherwise. Nonetheless, these changes would yield relative increases in atmospheric concentrations of particulates with measurable adverse health effects. We estimate the consequences for increased national CO2 emissions will range from 75 to 133.9 million tons. Our benchmark suggests an increase of 113.50 million tons, equal in magnitude to about 40% of the reductions needed by the year 2000 under the Climate Change Action Plan. Our estimate of NOx emission changes is less than other studies, with the exception of the FERC EIS, primarily because we explicitly take into account capacity constraints on inter-regional transmission and use different emission rates. Our estimate is greater than the FERC EIS because we allow for a portion of the power generated for inter-regional transmission to meet new demand stimulated by an anticipated decline in price. Second, we allow a portion of imported power to back out higher cost nuclear rather than fossil baseload. These are important economic changes that we believe will characterize a more competitive industry, and which point toward potentially more significant environmental consequences than recognized in the FERC EIS. Because we focus on increased generation from coal facilities, we characterize our findings as a worst case interim outcome under restructuring. However, we also think it is the most likely result of increased competition resulting from industry restructuring over the next few years. Our estimated emission changes are compared with those of previous studies in Table 13. The features of these various studies are summarized in Table 1. Our analysis of alternative scenarios yields considerable variation in the predicted levels of emissions and where they occur. This leads us to offer our results with caution, and to have less confidence in the outcomes of previous studies because of the sensitivity of results to the variety of factors that we think important. One of the central questions in the restructuring debate concerns what would happen to air quality in regions neighboring those where generation may increase, with special concern focused on potential changes in the Northeast. We find the changes in pollutant concentrations resulting from changes in NOx emissions (excluding secondary ozone changes) would be substantially greater in regions where generation is increasing than in neighboring regions. The region likely to experience the largest adverse changes in air quality resulting from changes in generation is the Ohio Valley (the ECAR power pool region). For instance, in our benchmark scenario, the population weighted changes in atmospheric concentration of nitrates is 2-3 times as great in the Ohio Valley and the Southeast (SERC) as in the Mid-Atlantic region (MAAC) and 3-4 times as great as in the Northeast (NPCC). These results are reported in Tables 11a and 11b, and illustrated graphically in Figure 2 of the conclusion. The likelihood of adverse impacts on NOx and nitrate concentrations in some regions as a result of restructuring suggests the need for a policy response to ensure that electricity restructuring does not lead to significant environmental degradation in any one area. If these changes merit a regulatory response, the regional variation in effects, and various sources of uncertainty about effects that may result, suggest the need for a flexible policy. One flexible approach that would ensure that changes do not lead to significant environmental degradation in any one area, while also avoiding unnecessary investments where emission changes do not occur, would be an intra- regional cap and trade program for NOx emissions from electric utilities. However, such an industry-specific program should be eclipsed if a more comprehensive program can be implemented by EPA permitting cost savings from inter-industry trades.

Local Options on Global Stocks: How the States are affecting the U.S. Debate on Climate Policy

This paper examines some of the implications of local policy-making with regard to the global issue of climate change. First, we assess what one may expect when small open economies, such as states, implement policies designed to affect global pollutants. Next, we briefly analyze some of the legal constraints on state actions. We then catalog some of the specific technologies used in the states to address carbon emissions. Finally, we provide some analysis of how states might implement emission control policies in a way that compensates important interests for some of their increased costs without losing the benefits of efficient policy design.climate policy; environmental federalism; laboratories of democracy; states

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.

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.

Measuring the Value of Health Improvements from Great Lakes Cleanup

Exposure to pollutants in the Great Lakes Region can have significant effects on human health. Some forms of pollution affect humans directly, through the air we breathe and water we drink. Other forms of pollution affect humans indirectly, for example through consumption of contaminated fish. In this paper the authors describe methods to measure health benefits in monetary and nonmonetary terms in the context of reductions in pollutants as part of a program to improve the environment in the Great Lakes. The paper is meant to be an introduction to this topic for a general audience interested in the Great Lakes.

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