Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement

standards were included in the SIP Call program because their NOx emissions con-
tribute to the non-attainment problems of downwind states. Although some states
contribute significantly more than others to the non-attainment problem, the NOx
SIP Call applies uniform stringency across all 19 states. The states that have been
identified as relatively "high damage" in terms of ozone exposure (Krupnick, Mauzer-
all) are also states that have restructured (and thus reduced the degree of economic
regulation in) their electricity industries.

The NOx SIP Call mandated a dramatic reduction in average NOx emissions
rates. Major changes have been underway to make sure that coal plants regulated
under the program achieved compliance by the deadline.⁵ To comply with the regu-
lation, firms can do one or more of the following: purchase permits to offset emissions
exceeding their allocation, install NOx controls to reduce emissions or reduce produc-
tion at dirtier plants during ozone season.

There are several reasons why coal plants operating in regulated electricity mar-
kets might have been more likely to adopt more capital intensive compliance strategies
(such as major pollution control technology retrofits), as compared to similar plants
operating in restructured electricity markets.⁶ Regulators in unrestructured markets
have authorized rate increases and cost recovery clauses to allow utilities to recover
their investments in NOx control technology retrofits (Business Wire, Charleston
Gazette, Megawatt Daily, PR Newswire, Southeast Power Report, Platts Utility and
Environment Report 1999, Platts Utility and Environment Report 2000, Platts Util-
ity and Environment Report 2002, Platts Utility and Environment Report 2003).
In restructured markets, plant owners must recover their environmental compliance
costs in the wholesale spot market, or in long term supply contracts that are based
on expected spot prices. Consequently, firms cannot be certain that they will be able
to recover large capital investments in abatement technology retrofits, nor can they

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