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

Abstract

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.