Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement

and emissions reduction efficiencies associated with different compliance alternatives
vary significantly, both across control technologies and across generating units with
different technical characteristics.

Let J_n represent the compliance strategy choice set for the nth firm. Using
detailed unit-level data, estimates of capital costs and variable compliance costs can
be generated for each of the {l..J_n} compliance alternatives, for all N firms.¹⁰ Figure 2
is a graphical representation of the compliance choice faced by a unit drawn randomly
from the sample. Each of the nine points plotted in fixed cost (8∕kW)∕variable cost
(cents∕kWh) space corresponds to a different compliance technology or "strategy".
Variable costs include the costs of operating the control technology, plus the costs of
purchasing permits to offset emissions.¹¹

A compliance-cost minimizing plant manager will want to choose a compliance
strategy corresponding to one of the points lying along the lower "compliance frontier"
that is approximated by the broken line in figure 2. Points lying to the right of this line
are not cost minimizing.¹² Points to the left would result in non-compliance (the plant
would not be purchasing enough permits to offset its emissions). Larger emissions
reductions are associated with more capital intensive compliance strategies along the
steeper portion of the compliance frontier. Retrofitting a unit with Selective Catalytic
Reduction (SCR) technology can reduce emissions by up to 90%. NOx emissions rates
can be reduced by as much as 35% through the adoption of Selective Non-Catalytic
Reduction Technology (SNCR) (EPA, 2003). Pre-combustion control technologies
such as low NOx burners or combustion modifications can result in emissions rate
reductions ranging from 15-50%, depending on the boiler (EPA, 1998, EPA, 1999,
EPRI).

Let the fixed capital investment associated with retrofitting unit n with NOx
control technology i be K_ni ; let υ_ni represent the variable operating costs, (including

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