Grantee Research Project Results
2001 Progress Report: Evaluation of Phase II Compliance with Title IV of the 1990 Clean Air Act Amendments
EPA Grant Number: R828630Title: Evaluation of Phase II Compliance with Title IV of the 1990 Clean Air Act Amendments
Investigators: Ellerman, A. Denny , Joskow, Paul L. , Montero, Juan Pablo , Schmalensee, Richard
Institution: Massachusetts Institute of Technology
EPA Project Officer: Chung, Serena
Project Period: October 1, 2000 through March 31, 2003
Project Period Covered by this Report: October 1, 2000 through March 31, 2001
Project Amount: $289,477
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The principal achievements during this first year of the grant are: (1) completion of a firm-level database integrating allowance transactions and abatement behavior; (2) analysis of the year 2000 compliance data; and (3) development of a model to analyze allowance banking behavior under Title IV. These achievements support the overall purpose of the research under this grant, which is "to provide a detailed, ex post evaluation of the abatement responses of emissions sources covered by Phase II and of the further development of the emissions permit markets."
Three specific tasks are to be performed as outlined in the original proposal and later modified by the memorandum to the Environmental Protection Agency (EPA) dated August 1, 2000: (1) a survey of costs and market behavior; (2) a re-estimation of counterfactual emissions; and (3) integration of emissions and allowance data. The work conducted this year falls under the third of these tasks. The cost survey has been delayed until the second year and the estimation of counterfactual emissions will be undertaken after 2001 data are available.
Progress Summary:
Overall, research under the grant is on schedule. The integrated database that will allow a more micro-level analysis of compliance behavior was debugged and now is being used for analysis; the larger amount of data concerning emissions and compliance data in 2000 has been successfully incorporated into our ongoing analysis. Several presentations concerning these data have been made, and papers are in varying stages of completion. Most of the research conducted during this first year concerned two topics: 2000 compliance and banking behavior. Several important points have emerged out of the analysis of the year 2000 data:
1. Prices, not allowance allocations in individual years, have the greatest
effect on abatement.
The year 2000 is the sixth year under Title IV. The significant reduction in
allowances for Phase I units had relatively little impact on emissions. This
would be predicted by economic theory on the assumption that the cumulative
allocation of allowances over the banking period determines prices and abatement,
not the allocation in any particular year. Units first becoming subject to Title
IV in 2000 undertook a significant reduction in emissions, as did the Phase
I units in 1995.
2. Not receiving an allowance endowment does not appear to impede the entry
of new units.
About 12 percent of the units first subject to Title IV in 2000 did not receive
an allocation of allowances. These units were located in 36 of the 48 states
and they included both coal and natural gas fired units. This suggests that
failing to receive an initial endowment does not create a barrier to entry.
3. Emission reductions under Title IV are located in the Midwestern region,
which is the source of acid rain precursor emissions transported to the Northeast.
With fossil-fired generating units subject to Title IV for the first time in 2000, a complete
picture of the geographical distribution of emission reductions under Title
IV can be made. In 11 Midwestern and Southeastern states, 83 percent total emission
reduction occurred. This includes all eight Midwestern states that are the main
source of acid rain precursor emissions in the Northeast.
Surprisingly, our analysis of banking indicates that utilities have engaged in optimal behavior. This conclusion challenges conventional wisdom (including some of our own) to the effect that too much banking has occurred in Title IV. This conclusion depends on the appropriate discount rate to be applied to banked allowances. Our research finds no correlation between the returns from holding allowances and those from investing in a broad index of stocks. Lack of correlation implies that all risk associated with allowances is specific to this asset, and therefore capable of being diversified, and that the appropriate discount rate for holding allowances is the risk-free rate.
These results are significant in providing further support for the view that participants respond rationally to the incentives provided by tradable permits, and market-based mechanisms are effective in achieving environmental goals at least cost.
Future Activities:
The main focus during 2002 will be the writing and publication of four papers. The analysis of aggregate banking behavior, which was largely conducted in 2001, will provide the material for a first paper assessing the optimality of banking under Title IV. The now operational firm-level, integrated database will provide the research basis for two further papers that are being started as of the time of this report. One concerns the effect of ownership changes, such as from regulated to unregulated status, on emissions abatement and the use of allowances; the other explores patterns of trading and allowance use at the firm level. The fourth paper concerns the costs of further SO2 emission abatement and the relative roles of scrubbing and natural gas.During this year, the survey will be designed and sent out and the 2001 data will be incorporated into databases and our analysis. We expect to begin the counterfactual estimation by the end of the second year and to start another paper describing compliance in the first 2 years of Phase II.
Journal Articles:
No journal articles submitted with this report: View all 42 publications for this projectSupplemental Keywords:
air emissions, acid deposition, tradable permits, cap systems, trade systems, environmental property rights, cost effectiveness., RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Economics and Business, Ecology and Ecosystems, Market mechanisms, environmental quality, market incentives, policy making, decision making, trading systems, environmental Compliance, emissions trading, abatement technology, tradable pollution permits, Clean Air Act, allowance allocation, pollution allowance trading, public policy, acid rain program, allowance market performanceProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.