Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement

revenues associated with producing more electricity will be absorbed by the SCR
technology constant. I add an interaction between variable compliance cost and the
SCR indicator variable to see if this model fits the data better. Adding this interac-
tion terms allows the coefficient on variable compliance costs to be more negative in
strategies that incorporate an SCR retrofit, to reflect the fact that ∆_rai might exceed
0 in these cases.

Estimation of the coefficient on the newly included interaction term is confounded
by the significant correlation between this interaction term and the SCR fixed effect.
Whereas we would expect that the coefficient on the SCR indicator variable should
become more positive (to reflect additional profits associated with higher production
levels) and a negative coefficient on the SCR∕variable cost interaction, I find the
opposite. The SCR fixed effect coefficient gets significantly more negative (-1.51)
whereas the interaction term coefficient is significant and positive (0.59). Including
this interaction term does not improve the fit of the model.

These results favor a rejection of this more restrictive specification. Empirical
evidence suggests that the effect of a unit’s choice of compliance strategy on ozone
season production levels is significant for those choices involving SCR retrofits. Anec-
dotal evidence suggests that managers did not take this relationship into account
when making their compliance decisions. Attempts to account for the possibility
that managers might have anticipated higher future production levels conditional on
adopting SCR to not improve the fit of the model.

References

Ai, C. R. and E.C. Norton. "Interaction Terms in Logit and Probit Models." Eco-
nomics Letters 80(2003): 123-29. 20.

Allison, P.D. "Comparing Logit and Probit Coefficients Across Groups." SMR∕Sociological

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