An Ex Post Evaluation of the U.S. Acid Rain Program

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Chan, Hei Sing
Cropper, Maureen
Emissions trading programs have been recommended by economists and implemented by policy makers because they are expected to keep compliance costs low; but, studies on actual savings are limited. This paper is the first to conduct a comprehensive ex post analysis of the cost savings from the Acid Rain Program (ARP), the largest emissions trading program to be implemented in the U.S. In Chapter 2, I provide a brief overview of the Acid Rain Program. I then discuss other policies that are relevant to evaluating the ARP including the New Source Performance Standard and local emission standards. I conclude the chapter by analyzing the determinants of local emission standards and arguing that it is safe to treat these standards as exogenous. In Chapter 3 I illustrate the cost savings from a cap-and-trade system such as the ARP, and discuss factors affecting the potential gains from trade and the determinants. I then estimate a discrete choice model of coal procurement and scrubber installation to recover structural parameters of compliance cost functions at the generating unit level. Using the model I predict compliance choices under a uniform emission standard that yields the same aggregate emissions as the ARP. In Chapter 4, I estimate cost savings under the ARP to be about 265-380 million (1995 USD) per year. The numbers are much smaller than in previous literature (Carlson et al., 2000; Ellerman et al., 2000). I propose that lower transport costs reduced cost heterogeneity across generating units, and that improvements in scrubbing technology and state policies may have also contributed to a decrease in cost savings.