Grantee Research Project Results
2002 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, 2001 through March 31, 2002
Project Amount: $289,477
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The objectives of this research project are to: (1) investigate the aggregate performance of cap-and-trade programs; (2) determine the characteristics of allowance markets; and (3) investigate the response of the owners of affected units to market prices signaling environmental scarcity. This research project extends research undertaken by researchers at the Massachusetts Institute of Technology (MIT) on Phase I (1995-1999) of the SO2 emissions trading program under Title IV of the 1990 Clean Air Act Amendments, and it specifically funds an evaluation of compliance during the first years of Phase II (2000-2002). These years are of particular interest because of the much larger universe of affected units, the more stringent limit, and the opportunity to observe how the large bank of allowances accumulated during Phase I is used. This project is part of a broader research program at the Center for Energy and Environmental Policy Research at MIT.
Progress Summary:
The progress is reported for each of the three research topics: banking, cost estimation, and integrated analysis of trading and abatement.
Banking
One major research topic under this project is emissions banking behavior, which for the first time with the start of the draw-down phase can be adequately evaluated. This phase of the research is completed, except for updating, and the results are contained in the papers authored by Ellerman and Montero, Montero, and Montero and Liski. The main research result is that banking under Title IV has been more efficient than had been expected.
Cost Estimation
Another focus of this research project is the proposed cost survey. It was postponed during this year while we explored the possibility of arriving at a reasonable cost estimate of Phase II costs based on the application of updated cost engineering data on scrubbing to the unit-specific characteristics of the remaining unscrubbed coal-fired units. This approach has proved feasible, and has made it possible to construct a marginal abatement cost curve for reductions of SO2 required to meet the existing SO2 cap and the lower caps proposed in the Clear Skies Legislation. When applied to the cost of meeting the Phase II cap in 2000-2002, the results fall within the cost bracket predicted in earlier work by researchers at Resources for the Future (Carlen, Burtraw, Cropper, and Palmer, Journal of Political Economy, 2000). These results are reported in working papers published by Ellerman (Ex Post Evaluation and Lessons from Phase II Compliance, 2003) and in the paper being written by Ellerman and Joskow, all cited below. The summary result is that Phase II compliance cost is considerably lower than what had been expected, even when allowance is made for errors in forecasting the amount of abatement required to meet the Title IV cap.
Integrated Analysis of Trading and Abatement
The third major topic of the research effort under this project has been the development of a database that contains firm-level data on abatement and trading behavior. The construction of this database has proved much more difficult than expected because of the significant changes of ownership of generating assets in the late 1990s; however, what we think is a reasonable accounting for firms with Phase I units, who constitute a large percentage of the observed abatement, has been completed. The main results to be reported from this research are the rapid emergence of intermediaries in allowance markets and the development of unexpected forms of trading, principally in the form of loans, swaps, and various derivative instruments.
Future Activities:
Year 3 of the project will be devoted to finishing the integrated database, updating data with the 2002 results, and completing papers that are underway, especially those summarizing Title IV performance including the first year of Phase II. A new, and previously unplanned, effort is being initiated to estimate the effect of the construction of significant new natural-gas-fired, combined cycle capacity in the early years of Phase II. This new capacity is not occasioned by Title IV, but it will have an effect on the emissions of generating units subject to Title IV and on the costs of this program.
Journal Articles:
No journal articles submitted with this report: View all 42 publications for this projectSupplemental Keywords:
air emissions, acid deposition, tradable permits, cap-and-trade systems, environmental property rights, cost effectiveness, market mechanisms, air toxics, Clean Air Act, abatement technology, acid rain program, allowance allocation, allowance market performance, decisionmaking, emissions trading, environmental compliance, environmental economics, environmental quality, market incentives, policymaking, pollution allowance trading, tradable pollution permits, trading systems., 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.