Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement

regulatory incentives across electricity markets have resulted in a disproportionate
amount of the mandated NOx emissions reductions occurring in regulated electricity
markets where ozone non-attainment is less of a problem. A recent study finds that
shifting 11 tons of NOx emissions per day from a relatively "low damage" location
(North Carolina, a state that has not restructured its electricity market) to a "high
damage" area (Maryland, a state that restructured its electricity industry) over a
ten day period could result in the loss of approximately one human life (Mauzerall
et al.). An average unit in the sample emitted 15 tons of NOx per day in 1999;
retrofitting a single unit with the most capital intensive NOx control option results
in daily reductions of 12 tons on average.

In the next section, I present a simple theoretical model of the compliance deci-
sion. I then describe the data and the empirical framework for assessing the relation-
ship between economic regulation in the electricity market and firms’ environmental
compliance decisions. Section 5 summarizes the results. Section 6 concludes.

The firm’s compliance choice

This section describes a simple model of a plant manager’s choice between J mutually
exclusive approaches to complying with the NOx SIP Call. The purpose of specifying
the model is to provide a framework to test the hypothesis that the structure of the
electricity market in which a unit is operating significantly affects a firm’s choice of
compliance strategy.

Two factors that are likely to figure significantly into a plant manager’s compli-
ance decision are the up-front capital costs associated with retrofitting a plant with
a particular NOx control technology, and the anticipated variable compliance costs
(i.e. the costs of operating the control technology plus the cost of purchasing required
permits per kWh of electricity generated). The capital costs, variable operating costs

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