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At What Cost do We Reduce Pollution? Shadow Prices of SO2 Emissions

The U. S. EPA's infant market for SO2 emissions has the potential for improving the cost effectiveness of reducing acid rain pollutants. If the market works as planned, over time one should see the cost of reducing additional amounts of sulfur dioxide converge across plants. The results of the study described here demonstrate that before the market opened marginal abatement costs varied wildly across plants. This work provides estimates of the shadow price of SO2 abatement using the output distance function approach for Illinois, Minnesota and Wisconsin coal-burning electric plants. The results demonstrate that the coal-burning electric plants with the highest emissions rates are also the plants with the lowest marginal abatement costs, a fact that may explain lower-than-expected prices in the new market for allowances. The data include information about plants with installed scrubber capital allowing for an investigation of the effect of scrubber capital on marginal abatement costs.

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Energy Specializations: Coal – Policy and Regulation; Energy and the Environment – Air Emissions (other than greenhouse gases); Energy and the Environment – Policy and Regulation

JEL Codes: Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, Q52: Pollution Control Adoption and Costs; Distributional Effects; Employment Effects, Q41: Energy: Demand and Supply; Prices, Q48: Energy: Government Policy

Keywords: Air pollution, sulfur dioxide (SO2) emissions, US EPA, coal-fired electricity, abatement costs

DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No4-3

Published in Volume19, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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