Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 9: Emissions Trading in the United States
INTRODUCTION Title IV of the 1990 Clean Air Act Amendments (1990 CAAA) introduces an emissions permit trading system to regulate SO2 emissions from US thermal power plants. The policy was implemented to reduce damage from acidification while achieving the lowest compliance costs.1 The oftencited measure of the success of the program is that the market allowance prices were substantially lower than the marginal compliance costs initially predicted. The decline in compliance costs can be attributed to three factors: (i) a decline in fuel prices coupled with a reduction in rail transportation costs for low sulfur western coal, (ii) exogenous technological progress that would have occurred in the absence of the program, and (iii) the technological progress that has been ignited by the allowance trading program (Burtraw et al., 2005). Using a production frontier approach, this study disentangles these effects by estimating exogenous (that is, the aggregate of (i) and (ii))2 and technological progress induced by the allowance system (that is, (iii)) that occurred from 1995 to 2007. Environmental policy is designed to enhance incentives for the development and utilization of environmentally friendly technologies beyond static efficiency (Kneese and Schultze, 1975; Akao and Managi, 2007).3 Firms change their technology in various directions depending upon prices and costs, which may be influenced by environmental regulations. Several theoretical studies show the advantages of market-based instruments (MBIs) over command-and-control regulations for inducing technological progress.4 Some recent studies have empirically examined the dynamic effects of environmental policy in the US electricity sector (Keohane,...
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