tions have the potential to interfere with permit markets’ ability to allocate emissions
reductions efficiently. This research addresses two questions: did economic regula-
tion in electricity markets affect how coal plant managers chose to comply with a
regional NOx emissions trading program, and did inter-state variation in electricity
industry regulation exacerbate the inefficiencies associated with an emissions based
permit market design that fails to reflect spatial variation in marginal damages from
pollution.3
The NOx State Implementation Plan (SIP) Call was designed to facilitate cost
effective emissions reductions of nitrogen oxides (NOx) from large stationary sources
through the introduction of an emissions trading program. In the period between
when the SIP Call was upheld by the US Court of Appeals (March 2000) and the
deadline for full compliance (May 2004), firms had to make costly decisions about
how to comply with this new environmental regulation.
NOx emissions contribute to the formation of ozone.4 High ambient ozone con-
centrations have been linked to increased mortality, increased hospitalization for respi-
ratory ailments, irreversible changes in lung capacity, reductions in agricultural yields
and increased susceptibility of plants to disease and pests. The NOx SIP Call was
designed to help northeastern states come into attainment with the Federal 1-hour
and 8-hour federal ozone standards of 120 ppb and 80 ppb respectively.
Ground-level ozone in the eastern United States has a lifetime of about 2 days
(Fiore et al..). Surface ozone concentrations are a function of both in situ ozone pro-
duction and pollutant transport; both are significantly affected by prevailing meteo-
rological conditions. Figure 1 illustrates how, during high ozone episodes, significant
portions of the northeast can fail to attain the Federal standard(OTAG). The dashed
line outlines the 19 state region regulated under the NOx SIP Call. The arrows repre-
sent transport wind vectors. Many states that are in attainment with Federal ozone