Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Capping Emissions: How Low Should We Go?

Investigating where environmental efficiency and good public policy intersect.
Fortnightly Magazine - December 2002

per year. For comparison, we forecast 2010 emissions to be 9.2 million tons under current policies. For NO x emissions, the efficient fee level is between $700 and $1,200 per ton, which corresponds to annual emissions of 1 million to 2.8 million tons. The most likely value of the fee is $1,100, which achieves annual emissions of 1.4 million tons. In comparison, we forecast 4.6 million tons for 2010 under the status quo. Note that these fees are equivalent to , not the average cost per ton reduced. (We discuss the costs and technologies associated with these reductions below.)

The emission fees approach that we analyze is analogous to an emission cap-and-trade program that achieves the same level of total emissions, with allowance prices equal to the emission fees under the following conditions. First, emission trading must occur without interference from state utility regulators or less flexible regulation (such as new technology requirements), which would increase costs.

Second, the program must use an auction to distribute emission allowances. A different approach to distributing emission allowances, such as grandfathering or output-based allocation, would incur greater cost to the economy than an auction, and therefore raise the efficient level of emissions. 3 The allowance auction that we model represents a substantial change from the granting of allowances to existing emitters, the predominant method used to allocate SO 2 allowances under the Clean Air Act. Generally, an allowance auction does impose higher costs on fossil-fired generators than under grandfathering, due to the need to purchase allowances. However, an auction typically leads to higher electricity prices than grandfathering, which helps to enhance profitability. An auction also provides a source of revenue that could be used to compensate those who suffer losses as a result of the policy. Past research has shown that the government would only need to give away a fraction of the allowances to compensate generators for the losses they would incur as a result of stricter emission caps. If an approach different than an auction were used, the efficient target would be less stringent than the level we identify.

On the other hand, some important omitted considerations could lead to the identification of an efficient emission cap that is lower than the level we identify. Our analysis of benefits accounts for health effects from SO 2, NO x and secondary particulates. However, it does not account for the effects of ozone or acidification on human health or the environment. Including these effects would raise marginal benefits and lead to a lower emission level. Uncertainty analysis in the modeling accounts for the parameter estimates from the health literature for estimating and valuing the effects of air pollution that are used in the TAF model, and for other key judgments.

The Geographic Scope of Benefits

A simple cap-and-trade program treats all emissions equally, but it is important to recognize that there are significant regional differences in the effects of pollution. Emissions from California and states in the mid-Atlantic area cause the greatest economic damages because they lead to changes in exposure for a large