Abstract
This paper derives a production analysis framework for modeling secondary benefits from environmental regulation, i.e. induced changes in yet unregulated pollutants. We emphasize the various ways in which the producers can respond to environmental regulations, and evaluate them in terms of their costs and their generation of secondary benefits. An application on the US electricity sector illustrates our main point: In our case, abatement technologies that reduce regulated emissions while leaving the plants’ unregulated emissions unchanged appear to be among the least costly producer responses to the existing sulfur and nitrogen regulations, but at the expense of limited secondary reductions in carbon dioxide emissions. This finding raises questions about the magnitude of the much debated secondary benefits from future regulations on carbon dioxide emissions, since similar abatement technologies are currently being developed for carbon dioxide. With new environmental issues emerging over time, our findings suggest that regulators should signal the possibilities of new regulations on connected pollutants to producers. Such information may be relevant for producers when choosing current abatement strategies—with minor cost increases to deal with today’s issues, overall compliance costs for near-future environmental problems may be lowered.
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Notes
There exist cases where end-of-pipe technologies which target reductions in a single pollutant generate additional reductions in related pollutants, e.g. the case of reductions in mercury emissions by end-of-pipe technologies that aim to lower sulfur dioxide and nitrogen oxides from power plants. We ignore such cases in the current paper, because we primarily focus on the interplay between sulfur, nitrogen, and carbon emissions—a case where secondary “end-of-pipe benefits” are irrelevant.
There may be other types of secondary benefits from reducing carbon emissions than reductions in related air pollutants. Examples include reduced traffic noise or road accidents related to carbon emission regulations for motor vehicles. We do not consider such wider benefits in our paper.
The post-abatement byproducts are usually thought to cause less environmental damage than the pre-abatement byproducts. Our analysis solely concerns undesirable byproducts that are under regulations, and it does therefore not consider the post-abatement byproducts.
The Frisch theory is not the primary focus of our paper and is therefore only briefly mentioned. See Frisch (1965) for details on the production theory and Førsund (2009) for a treatment on the applicability of the Frisch’s theory to cases with undesirable outputs. We note that Frisch’s case of no assortment is closely related to Kohli’s (1983) output-price nonjointness, which is a generalization of the Leontief technology. Simply put, this model structure imposes a fixed relationship between desirable and undesirable outputs for each input vector. See Chambers (1988) for technical details on Kohli nonjointness.
The term unregulated emissions refers to pollutants that are not under environmental regulation. One referee pointed out that the term unregulated emissions resembles uncontrolled emissions. We stress that these terms are not related and that the latter refers to pre-abatement emissions. Both regulated and unregulated emissions may be quantified in terms of uncontrolled emissions. Similarly, there is no one-to-one relationship between the terms regulated emissions and controlled emissions.
A similar argument can be made about emissions allowances. In the text, however, we only consider abatement as a way of relaxing emissions constraints. This is sufficient for shedding light on our main arguments. Intuitively we think of emission allowances and abatement as perfect substitutes, where the least costly way of reducing emission constraints will be preferred by the producers.
See Førsund (2009) for a discussion on explicit modeling of abatement processes.
The Welch and Barnum (2009) criterion is a “revealed preference approach” to identifying power plants with coal to gas substitution possibilities. Alternatively, the sample can be selected by a “stated preference approach”, by considering plants that report coal and natural gas cofiring or switching in EIA-860. We identify two issues with the latter approach. First, 40 percent of the plants that report coal- and gas cofiring or switching do not belong to sector 1 in EIA’s classification (traditional regulated electric utilities), which means that the selected plants may not all have access to the same technology or operate in the same type of environment. Second, only about half of the plants that report coal- and gas cofiring or switching satisfy the Welsch and Barnum selection criterion, with most plants having low gas shares. The low weight on gas consumption is in turn reflected by the DEA model, which estimates production possibilities from realized data without taking unrealized option values on fuel substitution into account.
Although the plants’ negligible consumption of oil and other gases is not explicitly accounted for by our empirical model, it is required to estimate the plants’ uncontrolled emissions. Since our empirical model uses the estimated uncontrolled emissions to calculate maximal profits under current emission constraints, it thereby allows the coal and gas usage to “dispose” emissions related to oil and other gases.
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The authors thank two anonymous referees for helpful comments. The usual disclaimer applies.
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Rødseth, K.L., Romstad, E. Environmental Regulations, Producer Responses, and Secondary Benefits: Carbon Dioxide Reductions Under the Acid Rain Program. Environ Resource Econ 59, 111–135 (2014). https://doi.org/10.1007/s10640-013-9720-5
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DOI: https://doi.org/10.1007/s10640-013-9720-5