Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement

There is arguably a dynamic component to the compliance strategy choice; man-
agers could purchase permits to offset their emissions in the early years of the program
and defer the decision to make major capital investments in emissions controls un-
til they had more information about permit market conditions and pollution control
technologies. This analysis focuses exclusively on the compliance choices that were
made in the years leading up to the compliance deadline (i.e.2000-2004). These deci-
sions will likely determine regional emissions patterns to a significant extent for the
foreseeable future. Because these choices were ineluctably made in a very short time
frame, they can be modelled as static decisions.

Each plant manager (indexed by n) faces a choice among J_n compliance strat-
egy alternatives. With the obvious exception of the "no retrofit" option, all of the
observed compliance strategies chosen by plant managers involve some combination
of 8 different NOx control technologies. Although there are 15 compliance "strate-
gies" represented in the data set, the most alternatives available to any one unit is
10. Some control technologies are only applicable to certain types of boilers.²³ Other
technology combinations were excluded from the choice set if the unit had already
installed the technologies prior to 2000.

The compliance cost that the nth manager associates with a given strategy i is
comprised of two components: a non-stochastic component that depends on observ-
able characteristics and a stochastic component:

Cni = a_i + β^v_nQ_nυ_ni + β_n Kni + ε_ni,                     (5)

The estimated variable cost (per kWh) of operating the control technology is V_ni.
The estimated variable costs associated with offsetting per kWh emissions with per-
mits is equal to the permit price τ multiplied by the post-retrofit emissions rate m_ni;

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