Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement

ginal effect of an incremental increase in the variable compliance costs of SCR on the
probability that SCR will be chosen is only 13% larger in restructured markets. In
percentage terms, the effect of electricity restructuring on the marginal effect of a
change in capital costs is greater than the corresponding effect of a change in vari-
able operating costs. A more formal statistical test of whether firms in restructured
markets are relatively more biased against incurring higher capital costs is a work in
progress.

Elasticity calculations provide a more intuitive characterization of the respon-
siveness of compliance decisions to changes in compliance costs. Table 6 presents the
elasticities of choice probabilities with respect to both capital and variable compli-
ance costs for the most common compliance choices. Elasticities are calculated using
both the CL and RPL coefficient estimates. The RPL model yields larger (in ab-
solute value) elasticity estimates for all compliance strategies, suggesting that the CL
model underestimates the responsiveness of compliance decisions to changes in com-
pliance costs. For example, if the expected capital cost of an SCR retrofit increases
by 1%, the RPL model predicts that the probability that a manager will choose to
retrofit his unit with SCR decreases by approximately 6% in regulated markets, and
approximately 11% in restructured electricity markets. The CL model predicts more
moderate decreases of 0.7% and 1.5% respectively. If anticipated variable costs in-
crease by 1%, the RPL model predicts that the probability of an SCR retrofit would
decrease by 2% and 4% in regulated and restructured markets respectively. The CL
model predicts decreases of only -0.80% and -1%.

Summary and Next Steps

This paper presents evidence that economic regulation in electricity markets has sig-
nificantly affected how electricity generators have chosen to comply with the NOx

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