depend on their pollution levels and pre-determined equipment capacity (or size).
Firms’ decisions on whether adopting a control equipment and how much the capacity
of the equipment should be are the key factors determining the amount of pollution
reduction. However, the control capacity of an equipment may not always be divisible
(continuous). In reality firms can adopt a control equipment with appropriate size that
closely matches their quantity of pollution and environmental standards. Therefore,
when the amount of reduced emission from the installed equipment exceeds the
standard, the trading market will be in excess supply of permits. The efficiency loss
from offering too many permits than needed may result from over investment on
equipment (or discontinuity of control capacity). Using the Kaohsiung and Pingtung
county as an example, the major base for heavy industries in Taiwan, this study tries
to estimate the possible efficiency loss that may arise from over investment on control
equipment if a permit trading system was used to regulate Nitrogen Dioxide (NOx)
emissions in this area.
The efficiency loss may be substantial in a trading market for NOx control. The
costs of NOx control technologis can be categorized into two groups, namely
capital-based and control-based. Cichanowicz et. al. (1991) indicated that the cost
associated with the use of a Low NOx Burner (LNB) may comprise 95% to 99%
capital and 1% to 5% operating and management expenses. Firms cannot adjust their
emission reduction levels once a certain size of LNB has been adopted. On the
contrary, Selective Catalytic Recircular (SCR) -another equipment often used for NOx
control, would be approximately 40% to 50% capital and 50% to 60% operating and
maintaining expense. When SCR is installed, firms are allowed to adjust their
emission reduction levels through switching catalyst as long as the emission levels are
within the SCR’s control capacity. That is, pollution can be further reduced by paying
higher variable costs. Even though the control efficiency and flexibility of SCR is
higher than LNB, high installing and operating costs of SCR have limited their use
only to certain industries (such as petroleum refinery).
Technology adoption is an important decision variable for firms. The cost per
unit abatement depends largely on the extent to which the emission control
equipments are utilized. Thus, the costs per unit of abatement are determined
endogenously and simultaneously with technology adoption, equipment utilization,
and permit buy/sell decisions. The fixed cost issue was not properly dealt with in the
permit trading literature. Most studies used the marginal analysis approach, that
incorporates a constant variable cost (including the operating costs and annualized
fixed costs) for each permit unit, assuming that firms can control the amount of
pollution reduction. However, when a particular technology is not used with its full
potential or the life of the permit trading program is shorter than the lifetime of