equipment. Therefore, this study assumes LNB and SCR as the only add-on²
equipments that will be used by the firms. Based on each firm’s size and emission
records, the available size of LNB or SCR is determined up front. Thus, firms only
have to make Yes/No decisions on technology adoption. The total cost of these control
systems includes fixed costs and variable costs. Fixed costs are the costs of
purchasing and installing equipment and are defined as total capital investment costs
by the EPA’s NOx control cost manual (1998). Variable costs incorporate the required
labor and fuel costs for running the machine. A capital recovery factor (CRF)³ with a
6 percent interest rate and 10-year machine life is used to calculate the annualized
fixed and variable costs.

Results

Two scenarios are considered in the simulation. The first scenario assumes that the
actual emission levels for firms in the 5-year planning horizon, i.e. 2007-2011, are the
same as their year 2000 baseline emissions. The second scenario assumes that the
actual emission levels will vary and are estimated using the previous emission records.
Besides the 10% reduction rule from the baseline level, we further simulate a
condition in which 20% reduction is required in both scenarios. The purpose of the
20% reduction rule is to evaluate the economic cost of a more stringent environmental
standard.

In the first scenario where the emission level is stable and the 10% reduction
rules is applied, about 10,184 units of ERC (9 % of the total ERCs issued by the EPA)
would be traded each year. Most KPERMS participants would be buyers in the market.
Only two firms, Taiwan Power and Taiwan Plastic companies, would adopt new
control equipment and become the only suppliers in the market. Both of these firms
would install LNB for NOx Control. However, they would generate more ERCs than
the market demand, which leads to an excess supply of 498.1 units of ERC. Since the
market is not cleared, the social planner’s model would not result in a market
equilibrium. Excess supply of permits also implies that the environmental standards
are over-achieved. The total discounted abatement cost for the KPERMS over the
5-year planning horizon would be approximately $3.7 million. Since the firms’
emission levels, annualized fixed and variable costs are the same during the planning

² “Add-on” systems are equipments installed downstream of an air pollution source to control its
emissions.

equipment.

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