Multi-Lateral Emissions Trading: Political Economy and Firm ResponseEPA Grant Number: R828631
Title: Multi-Lateral Emissions Trading: Political Economy and Firm Response
Investigators: Farrell, Alexander , Dowlatabadi, Hadi , Epple, Dennis , Farrow, Scott
Institution: Carnegie Mellon University
EPA Project Officer: Lee, Sonja
Project Period: September 1, 2000 through August 31, 2002
Project Amount: $149,366
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
We will study the first multi-jurisdictional emissions trading regime to be implemented, the "OTC NOX Budget," which is now in place in the northeastern United States to help control tropospheric ozone. This program was created through the development of independent, but coordinated state-level laws and regulations, and affects over 400 facilities, most of which are electricity generation plants.
We will evaluate multi-jurisdictional emissions trading among firms whose operations and markets may cross the boundaries between jurisdictions. We will study three issues in particular: the political economy of the creating an emissions trading regime among multiple jurisdictions; the costs of such a program; and its effect on the regulated industry especially in terms of emissions, competitiveness, and technological change. This work will complement prior research on emissions trading programs that have been implemented within a single jurisdiction (e.g. the U.S. Acid Rain program for sulfur dioxide and California's RECLAIM program).
We will develop models of state and firm behavior, based on a detailed understanding of the relevant institutions and markets. Data will be collected on the following: 1) allowance allocations, prices, and trade volumes; 2) electricity generation, prices, and trade volumes; 3) fuel prices and use: and 4) control technology investments and utilization. The quantitative data will be augmented by interviews with government, environmental, and industry participants.
This research will enable localities, the states, and other government agencies to better understand how to develop emissions trading programs among multiple jurisdictions, including internationally. It will also help firms understand the range of options they have in responding to NOX control requirements and improve the understanding of the potential trajectory of costs for NOX control in the future. The results will illuminate how regulation-induced technological change occurs, including how that change affects the cost of regulation. Emissions trading can be an effective method of regulation that can reduce costs, improve flexibility for industry, and provide incentives for innovation in pollution prevention and control.
However, it is relatively new and somewhat more complex than many existing forms of regulation, and until now has not been implemented in multi-jurisdictional applications. This research will help the beneficiaries listed above understand how emissions trading might apply to their situation, thus improving the chances that they will be able to implement effective programs themselves. This will result in more cost-effective allocation of federal and state environmental protection resources. Similarly, regulated industry will be better able to manage their responses to such a program, which will provide for more cost-effective allocation of private environmental protection resources. Thus, this research will help improve the abilities of both public and private organizations to protect human health and the environment.