[BETA] Fortnightly

Investigating where environmental efficiency and good public policy intersect.

More than a decade after adopting the first national cap-and-trade approach to regulating pollution from electricity generators, Congress is considering another round of cap-and-trade regulations on a number of gases emitted by electricity generators. Three bills were introduced into the 107th Congress-and are expected to be reintroduced in a similar form in next year's 108th Congress-that propose dramatic reductions in emissions of sulfur dioxide (SO ₂), nitrogen oxides (NO _x), and mercury from the electricity sector. In addition, several states already have adopted limits on emissions of multiple pollutants from electricity generators, and others are considering doing so.

A central question in designing multi-pollutant regulation is at what level to set the emission caps. Economists define the efficient level of an emission cap as that at which the incremental benefit of another ton of emission reduction equals the incremental cost of obtaining that reduction. In this article, we describe the results of our analysis of the efficient levels for NO _x and SO ₂ based on health science and economics. We discuss the geographic distribution of the likely air quality improvements, and likewise the consequences for electricity producers and customers. We also use insights from this analysis to evaluate, indirectly, all three legislative proposals introduced in the 107th Congress.

In brief, we find the emission caps for SO ₂ and NO _x for all three legislative proposals are well within the likely range for the efficient level of reductions. However, a number of qualitative issues regarding how the regulation takes shape affect whether the emission cap levels we find to be efficient actually would be good public policy.

Efficient Emission Levels for SO ₂ and NO _x

To investigate the efficient emission levels of SO ₂ and NO _x from electricity generators, we used two simulation models to calculate the incremental costs and incremental environmental benefits associated with emission fees imposed in the year 2010. We focus on 2010 because it is a reasonable date by which additional emission reductions might be achieved. The effects on fuel choice, investment in generation technologies and emission controls, costs, prices, and emissions at different locations were simulated using Resources for the Future's (RFF) Haiku electricity market model. ¹ The impact of the resulting emissions changes on atmospheric concentrations of particulate matter and other pollution, and subsequent effects on the environment and human health, were simulated using the Tracking and Analysis Framework (TAF) model. ² These benefits are expressed in dollar terms and compared to costs to find the efficient pollution levels.

We identified the efficient point in our models by searching for the level of a "pollution tax" that would induce the marginal cost of reducing pollution to equal the marginal benefits. Our analysis suggests that the efficient level of an SO ₂ emissions fee in 2010 ranges from $1,800 to $4,700 per ton, corresponding to annual emissions between 0.9 and 3.1 million tons (in 1999 dollars). The most likely value is $3,500 per ton, corresponding to annual emissions of about 1.1 million tons