Specific Objectives of the Project

This project will examine the performance of the first large-scale cap-and-trade pollution control program in the United States, the Acid Rain Program (ARP). We will focus on the implications of ARP for the implementation of the cap-and-trade program in California, AB 32. In particular, we will test the effects of operators' uncertainty concerning future regulation on their adoption of abatement technology.

Summary of Results

As the first large-scale, long-term application of cap and trade to control emissions, the Acid Rain Program (ARP) has attained remarkable success in terms of sulfur dioxide (SO2) emission reduction and abatement cost saving. In this study, we first investigate electric generating units' compliance strategies under the ARP using a discrete-continuous model. In the first step, a unit is assumed to make a discrete choice between two major SO2 abatement strategies, installing a scrubber or switching to/blending with low-sulfur coal (jointly noted as non-scrubbing). Conditional on the chosen abatemen t strategy, the continuous emission rates of each unit are determined in the second step. The results show that units with higher potential scrubbing capital costs and lower low-sulfur coal prices are more likely to choose coal switching/blending. Also, older units and units covered in Phase II of the ARP tend to choose coal switching/blending. Conditional on non-scrubbing, the emission rates are increasing in price premium of low-sulfur coal, electricity output, and original sulfur content, and decreasing in unit capacity. The estimate compliance costs for Phase I units are around 85.26 million dollars in 1995, and around 673.21 million dollars for all sample units in 2000.

In order to eliminate the significant contribution of SO2 emissions to the downwind non-attainments, EPA issued the Clean Air Interstate Rule (CAIR) in 2005, applying a more stringent emission cap on some upwind states. The CAIR was vacated in 2008. In 2011, EPA finalized the Cross-State Air Pollution Rule (CSAPR) to replace CAIR, but the implementation of the CSAPR is still unclear. The regulatory uncertainty since 2005 resulted in dramatic fluctuation of SO2 allowance prices. Anticipating the more stringent CAIR, the SO2 allowance prices increased remarkably to the peak of around $1,200 /ton in 2005. After CAIR was vacated, the allowance prices decreased sharply to around $70/ton in 2009. Using the estimation results of the discrete-continuous model, we further simulate units' compliance strategies and calculate their compliance costs associated with these price fluctuations. In 2005, if allowance price peaks at $1,200/ton, 725 of 872 sample units would install scrubbers, leading to 10.4 million tons of SO2 emission abatements and 4273 million dollars of abatement costs. In 2009, if allowance price drops to $70/ton, only 9 units would choose scrubbing, resulting in 1.07 million tons of abatements and 37.6 million dollars of abatement costs.