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

Fortnightly Magazine - May 15 1998

cost that it became the price set for a reserve supply of allowances that the government guaranteed to make available to new companies as a last resort in the event of hoarding. The punitive charge associated with failure to comply was set at $2,000 per ton, "several times more than the estimated average cost per ton of reducing SO2 emissions." %n5%n This penalty was selected because it was viewed as being so much higher than any expected costs of obtaining allowances that it would serve as a deterrent to non-compliance.

Policymakers generally rely on total annual cost to measure total control costs. They may also refer to average annual cost, particularly where there are variations in estimates of the total tons reduced. Table 1 lists a number of such cost estimates for Title IV, starting at the time that its final form was emerging in legislative bills in 1989. The estimates from the original studies have all been converted to a common year (1995 constant dollars). Since the cap is different for Phase I and Phase II, the costs will be different between the two time periods and are shown separately. The estimates for Phase II are all for the year 2010, by which time the bank can reasonably be expected to have been used up. Thus, 2010 marks the first period in the different studies that exhibits a comparable degree of stringency and therefore comparable cost estimates.

Table 1 shows that, even after inflating early cost estimates to 1995 dollars, the estimates for average cost per ton generally vary in a range of $150 to $300 per ton for Phase I and $225 to $500 per ton for full implementation in Phase II. TBS noted that its cost estimates would be 20 to 25 percent lower if emissions trading were included in the estimate. %n6%n This adjustment is shown in the table. All other estimates in Table 1 did incorporate fully flexible emissions trading.

Table 1 also provides estimates of marginal costs, which, though not particularly useful for understanding a program's total control costs, are nevertheless useful for forecasting allowance prices. (With the advent of trading, they have often been the values cited in trade press summaries of new studies.) Analyses by EPRI have focused almost entirely on marginal costs. Estimates of all three cost indicators are presented in the same table to help eliminate confusions from the past.

Phase I Costs:

Recognizing Realities in Fuel Markets

Table 1 shows how the pre-implementation estimates for Phase I ranged from about $150 to $300 in terms of average cost per ton. Yet, anyone who has given passing attention to the press is likely to be aware that allowance prices have always appeared lower than expected, with a particularly notable drop to approximately $70 per ton in March 1996. Why the discrepancy? Had Title IV actually incurred lower control costs than estimated?

The most recent in-depth assessment of actual costs incurred for Phase I comes from the Massachusetts Institute of Technology, in work funded by the National Acid Precipitation Assessment Program. Their results