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The Cost of Reducing SO2 (It?s Higher Than You Think)

Fortnightly Magazine - May 15 1998

cost estimates.

Program Terminology

Benchmarks for Cost Comparisons

TOTAL CONTROL COST: Sum of control costs (both capital and operating) for all individual sources covered in program. Often stated in terms of total annual costs, to reflect actual expenditure flows. (Note: All definitions listed exclude ancillary costs such as government administration and monitoring.)

AVERAGE COST: Total control cost (see above) divided by estimated tons of emissions reduced, allows comparability by policymakers for programs with different control objectives. Often confused with marginal cost (below), since each is expressed in dollars per ton.

MARGINAL COST: The highest per-ton cost incurred by any individual source or source category included in calculating average cost (see above). Always equals or exceeds average cost. Difference between marginal and average cost can vary significantly between programs. Often considered a good predictor of long-run allowance prices for market-based emissions programs.

ALLOWANCE PRICE: The cost of buying an allowance. Also represents price received for selling an allowance created and earned by undertaking physical control measures, but does not necessarily represent the cost incurred thereby.

LONG-RUN COSTS: Includes cost of building or installing a control measure (the capital cost). Capital costs are always included in regulatory cost projections, and for the most part, both average and marginal cost projections represent long-run estimates.

SHORT-RUN COSTS: The cost of operating the control equipment. Is most relevant for explaining disequilibrium market price behavior. Short-run costs, and hence midterm market outcomes, may vary significantly from the actual total costs of the control program, though each is expressed in dollars per ton.

TIME FRAME: Is the cost estimate of a Phase I cost, an early Phase II cost, or a later, "fully implemented" Phase II cost?

1 Before the Committee on Environment and Public Works, U.S. Senate, Feb. 12, 1997.

2 Washington D.C., Oct. 22, 1997.

3 EPRI, SO2 Compliance and Allowance Trading: Developments and Outlook, prepared by K. D. White, Palo Alto, California, April 1997; tr-107897 4129; p. 1-12.

4 Crocker T. D.; J. L. Regens. "Acid Ceposition Control," Env. Sci. & Tech., 1985. 19(2). pp. 112-116; (Table 2).

5 U. S. General Accounting Office. Allowance Trading Offers an Opportunity to Reduce Emissions at Less Cost, Washington, D.C., December 1994; gao/rced-95-30; p 18.

6 Temple, Barker & Sloane, Incorporated, Economic Evaluation of H.R.3030/S.1490 "Clean Air Act Amendments of 1989": Title V, The Acid Rain Control Program, slides prepared for the Edison Electric Institute, Aug. 30, 1989, p. 4.

7 Ellerman A. D.; Schmalensee R.; et al., Emissions Trading Under the U.S. Acid Rain Program: Evaluation of Compliance Costs and Allowance Market Performance, MIT Center for Energy and Environmental Policy Research, Massachusetts Institute of Technology: Cambridge, Massachusetts, 1997; mit e40-279, p 43.

8 Ellerman A. D.; Schmalensee R.; et al., op. cit. p 15.

9 Ibid, Table 8 and p 49.

10 EPRI, The New Environmental Drivers: Challenges to Fossil Generation Planning and Investment, prepared by K. D. White, Palo Alto, Calif., March 1998 (in press), epri tr-110261, p. 4-23.

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