An Empirical Study of the SO2 Allowance Market: Effects of PUC Regulations

The Impact of Trading on the Costs and Benefits of the Acid Rain Program

“…1 There is, however, no econometric study of the cost savings achieved by the ARP once the program was fully operational that is based on actual compliance data. Studies of the cost savings delivered by the ARP either are ex ante in nature (Carlson et al 2000) or focus on Phase I of the program (Arimura 2002;Keohane 2007;Sotkiewicz and Holt 2005;Swinton 2002Swinton , 2004. Carlson et al (2000) project cost savings based on marginal abatement cost (MAC) functions estimated using pre-ARP data.…”

“…Previous studies suggest that this was not the case during Phase I of the program (Carlson et al 2000;Sotkiewicz and Holt 2005;Swinton 2002Swinton , 2004. Several factors could have prevented electric utilities from reaching the least-cost solution: (1) utilities subject to regulation by Public Utilities Commissions (PUCs) could pass compliance costs on to ratepayers and therefore had no incentive to minimize costs (Sotkiewicz and Holt 2005;Cicala 2015); (2) the fact that PUCs allowed scrubbers to enter the rate base and thus earn a normal rate of return provided incentives to scrub rather than substitute low-for high-sulfur coal (Fullerton et al 1997;Sotkiewicz and Holt 2005); and (3) uncertainty about the treatment of allowances in the rate base provided incentives to fuel switch rather than purchase allowances (Arimura 2002). The least-cost options for fuel switching were also prevented by regulators who encouraged the purchase of in-state coal (Cicala 2015) or by long-term coal contracts that might, in practice, be difficult to break.…”

The So2 Allowance Trading System and the Clean Air Act Amendments of 1990: Reflections on Twenty Years of Policy Innovation

“…In the early years, power-plant operators may have lacked the information (and associated experience and confidence) to take full advantage of the flexibility that the SO 2 allowance-trading system offered. Third, in the early years of the program, utilities were subject to economic regulation at the state level that had the effect of distorting or constraining their responses to market-based federal environmental regulation (Arimura 2002;Bohi and Burtraw 1992). Some faced uncertainty over whether state regulators would approve the inclusion of costs incurred to purchase emissions allowances, in those states that allowed costs to be recovered from electric ratepayers.…”

Peer Reviewed: Trading Cases

“…State public utility commissions that establish cost-recovery rules for firms still operating where electricity prices are regulated exacerbate this risk-averse behavior. Ample anecdotes, statistical analyses (5), and simulation studies show state regulators provided incentives for compliance strategies that raised program costs.…”