Skip to main content

Environmental Regulations, Producer Responses, and Secondary Benefits: Carbon Dioxide Reductions Under the Acid Rain Program

Abstract

This paper derives a production analysis framework for modeling secondary benefits from environmental regulation, i.e. induced changes in yet unregulated pollutants. We emphasize the various ways in which the producers can respond to environmental regulations, and evaluate them in terms of their costs and their generation of secondary benefits. An application on the US electricity sector illustrates our main point: In our case, abatement technologies that reduce regulated emissions while leaving the plants’ unregulated emissions unchanged appear to be among the least costly producer responses to the existing sulfur and nitrogen regulations, but at the expense of limited secondary reductions in carbon dioxide emissions. This finding raises questions about the magnitude of the much debated secondary benefits from future regulations on carbon dioxide emissions, since similar abatement technologies are currently being developed for carbon dioxide. With new environmental issues emerging over time, our findings suggest that regulators should signal the possibilities of new regulations on connected pollutants to producers. Such information may be relevant for producers when choosing current abatement strategies—with minor cost increases to deal with today’s issues, overall compliance costs for near-future environmental problems may be lowered.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3

Notes

  1. 1.

    There exist cases where end-of-pipe technologies which target reductions in a single pollutant generate additional reductions in related pollutants, e.g. the case of reductions in mercury emissions by end-of-pipe technologies that aim to lower sulfur dioxide and nitrogen oxides from power plants. We ignore such cases in the current paper, because we primarily focus on the interplay between sulfur, nitrogen, and carbon emissions—a case where secondary “end-of-pipe benefits” are irrelevant.

  2. 2.

    There may be other types of secondary benefits from reducing carbon emissions than reductions in related air pollutants. Examples include reduced traffic noise or road accidents related to carbon emission regulations for motor vehicles. We do not consider such wider benefits in our paper.

  3. 3.

    The post-abatement byproducts are usually thought to cause less environmental damage than the pre-abatement byproducts. Our analysis solely concerns undesirable byproducts that are under regulations, and it does therefore not consider the post-abatement byproducts.

  4. 4.

    The Frisch theory is not the primary focus of our paper and is therefore only briefly mentioned. See Frisch (1965) for details on the production theory and Førsund (2009) for a treatment on the applicability of the Frisch’s theory to cases with undesirable outputs. We note that Frisch’s case of no assortment is closely related to Kohli’s (1983) output-price nonjointness, which is a generalization of the Leontief technology. Simply put, this model structure imposes a fixed relationship between desirable and undesirable outputs for each input vector. See Chambers (1988) for technical details on Kohli nonjointness.

  5. 5.

    The term unregulated emissions refers to pollutants that are not under environmental regulation. One referee pointed out that the term unregulated emissions resembles uncontrolled emissions. We stress that these terms are not related and that the latter refers to pre-abatement emissions. Both regulated and unregulated emissions may be quantified in terms of uncontrolled emissions. Similarly, there is no one-to-one relationship between the terms regulated emissions and controlled emissions.

  6. 6.

    A similar argument can be made about emissions allowances. In the text, however, we only consider abatement as a way of relaxing emissions constraints. This is sufficient for shedding light on our main arguments. Intuitively we think of emission allowances and abatement as perfect substitutes, where the least costly way of reducing emission constraints will be preferred by the producers.

  7. 7.

    See Førsund (2009) for a discussion on explicit modeling of abatement processes.

  8. 8.

    The Welch and Barnum (2009) criterion is a “revealed preference approach” to identifying power plants with coal to gas substitution possibilities. Alternatively, the sample can be selected by a “stated preference approach”, by considering plants that report coal and natural gas cofiring or switching in EIA-860. We identify two issues with the latter approach. First, 40 percent of the plants that report coal- and gas cofiring or switching do not belong to sector 1 in EIA’s classification (traditional regulated electric utilities), which means that the selected plants may not all have access to the same technology or operate in the same type of environment. Second, only about half of the plants that report coal- and gas cofiring or switching satisfy the Welsch and Barnum selection criterion, with most plants having low gas shares. The low weight on gas consumption is in turn reflected by the DEA model, which estimates production possibilities from realized data without taking unrealized option values on fuel substitution into account.

  9. 9.

    Although the plants’ negligible consumption of oil and other gases is not explicitly accounted for by our empirical model, it is required to estimate the plants’ uncontrolled emissions. Since our empirical model uses the estimated uncontrolled emissions to calculate maximal profits under current emission constraints, it thereby allows the coal and gas usage to “dispose” emissions related to oil and other gases.

References

  1. Aigner DJ, Lovell CAK, Schmidt P (1977) Formulation and estimation of stochastic frontier production function models. J Econom 6:21–37

    Google Scholar 

  2. Arrow KJ, Fisher AC (1974) Environmental preservation, uncertainty, and irreversibility. Q J Econ 88:312–319

    Google Scholar 

  3. Ayres RU, Kneese AV (1969) Production, consumption, and externalities. Am Econ Rev 59:282–297

    Google Scholar 

  4. Ayres RU, Walter J (1991) The greenhouse effect: damages, costs and abatement. Environ Resour Econ 1:237–270

    Google Scholar 

  5. Baumgärtner S, Arons JS (2003) Necessity and inefficiency in the generation of waste. J Ind Ecol 7:113–123

    Google Scholar 

  6. Brännlund R, Färe R, Grosskopf S (1995) Environmental regulation and profitability: an application to Swedish pulp and paper mills. Environ Resour Econ 6:23–36

    Google Scholar 

  7. Burtraw D, Krupnick A, Palmer K et al (2003) Ancillary benefits of reduced air pollution in the US from moderate greenhouse gas mitigation policies in the electricity sector. J Environ Econ Manage 45:650–673

    Google Scholar 

  8. Chambers RG (1988) Applied production analysis: a dual approach. Cambridge University Press, Cambridge

    Google Scholar 

  9. Cline W (1992) The economics of global warming. Institute for International Economics, Washington, DC

    Google Scholar 

  10. Coelli T, Lauwers L, Van Huylenbroeck G (2007) Environmental efficiency measurement and the materials balance condition. J Prod Anal 28:3–12

    Google Scholar 

  11. Coggins JS, Swinton JR (1996) The price of pollution: a dual approach to valuing \(\text{ SO }_{2}\) allowances. J Environ Econ Manage 30:58–72

    Google Scholar 

  12. Conrad JM (1980) Quasi-option value and the expected value of information. Q J Econ 94:813–820

    Google Scholar 

  13. Ebert U, Welsch H (2007) Environmental emissions and production economics: implications of the materials balance. Am J Agric Econ 89:287–293

    Google Scholar 

  14. Ekin P (1996) The secondary benefits of \(\text{ CO }_{2}\) abatement: how much emission reduction do they justify? Ecol Econ 16:13–24

    Google Scholar 

  15. Ellerman A D (2003) Lessons from phase 2 compliance with the U.S. Acid Rain Program. MIT _CEEPR, MIT Center for Energy and Environmental Policy Research

  16. EPA (2011) Clean air interstate rule, Acid Rain Program, and former \(\text{ NO }_{{\rm x}}\) budget trading program 2010 progress report. U.S. Environmental Protection Agency

  17. Färe R, Grosskopf S, Lovell CAK et al (1989) Multilateral productivity comparisons when some outputs are undesirable: a nonparametric approach. Rev Econ Stat 71:90–98

    Google Scholar 

  18. Färe R, Grosskopf S, Lee H (1990) A nonparametric approach to expenditure-constrained profit maximization. Am J Agric Econ 72:574–581

    Google Scholar 

  19. Färe R, Grosskopf S, Noh D-W et al (2005) Characteristics of a polluting technology: theory and practice. J Econom 126:469–492

    Google Scholar 

  20. Färe R, Grosskopf S, Pasurka CA (2007) Pollution abatement activities and traditional productivity. Ecol Econ 62:673–682

    Google Scholar 

  21. Färe R, Grosskopf S, Pasurka CA et al (2012) Substitutability among undesirable outputs. Appl Econ 44:39–47

    Google Scholar 

  22. Farrell A, Carter R, Raufer R (1999) The NOx Budget: market-based control of tropospheric ozone in the northeastern United States. Resour Energy Econ 21:103–124

    Google Scholar 

  23. Førsund FR, Strøm S (1988) Environmental economics and management: pollution and natural resources. Croom Helm, London

    Google Scholar 

  24. Førsund FR (2009) Good modelling of bad outputs: pollution and multiple-output production. Int Rev Environ Resour Econ 3:1–38

    Google Scholar 

  25. Frisch R (1965) Theory of production. Reidel, Dordrecht

    Google Scholar 

  26. Henry C (1974) Investment decisions under uncertainty: the “irreversibility effect”. Am Econ Rev 64:1006–1012

    Google Scholar 

  27. Kohli U (1983) Non-joint technologies. Rev Econ Stud 50:209–219

    Google Scholar 

  28. Kolstad CD (2000) Environmental economics. Oxford University Press, New York

    Google Scholar 

  29. Kuosmanen T (2006) Stochastic nonparametric envelopment of data: combining virtues of SFA and DEA in a unified framework. MTT discussion paper, Agrifood Research Finland

  30. Kuosmanen T (2005) Weak disposability in nonparametric production analysis with undesirable outputs. Am J Agric Econ 87:1077–1082

    Google Scholar 

  31. Kuosmanen T (2008) Representation theorem for convex nonparametric least squares. Econom J 11:308–325

    Google Scholar 

  32. Kuosmanen T (2009) Data envelopment analysis with missing data. J Oper Res Soc 60:1767–1774

    Google Scholar 

  33. Kuosmanen T, Laukkanen M (2011) (In)efficient environmental policy with interacting pollutants. Environ Resour Econ 48:629–649

    Google Scholar 

  34. Kuosmanen T, Kortelainen M (2012) Stochastic non-smooth envelopment of data: semi-parametric frontier estimation subject to shape constraints. J Prod Anal 38:11–28

    Google Scholar 

  35. Kydland FE, Prescott EC (1977) Rules rather than discretion: the inconsistency of optimal plans. J Polit Econ 85:473–491

    Google Scholar 

  36. Lauwers L (2009) Justifying the incorporation of the materials balance principle into frontier-based eco-efficiency models. Ecol Econ 68:1605–1614

    Google Scholar 

  37. Lee H, Chambers RG (1986) Expenditure constraints and profit maximization in U.S. agriculture. Am J Agric Econ 68:857–865

    Google Scholar 

  38. Lee M (2005) The shadow price of substitutable sulfur in the US electric power plant: a distance function approach. J Environ Manage 77:104–110

    Google Scholar 

  39. Meeusen W, van den Broeck J (1977) Efficiency estimation from Cobb–Douglas production functions with composed error. Int Econ Rev 18:435–444

    Google Scholar 

  40. Mekaroonreung M, Johnson AL (2012) Estimating the shadow prices of \(\text{ SO }_{2}\) and \(\text{ NO }_{{\rm x}}\) for U.S. coal power plants: a convex nonparametric least squares approach. Energy Econ 34:723–732

    Google Scholar 

  41. Mekaroonreung M, Johnson A L (2012) Imposing conservation of mass in abatement function estimates: \(\text{ NO }_{{\rm x}}\) generation in coal-fired power plants. working paper, Texas A &M University

  42. Murty S, Russell RR, Levkoff SB (2012) On modeling pollution-generating technologies. J Environ Econ Manage 64:117–135

    Google Scholar 

  43. Nordhaus WD (1991) To slow or not to slow: the economics of the greenhouse effect. Econ J 101:920–937

    Google Scholar 

  44. Pasurka CA (2006) Decomposing electric power plant emissions within a joint production framework. Energy Econ 28:26–43

    Google Scholar 

  45. Pethig R (2003) The “materials balance” approach to pollution: its origin, implications and acceptance. Economics Discussion Paper, University of Siegen

  46. Pethig R (2006) Non-linear production, abatement, pollution and materials balance reconsidered. J Environ Econ Manage 51:185–204

    Google Scholar 

  47. Riahi K, Rubin ES, Taylor MR et al (2004) Technological learning for carbon capture and sequestration technologies. Energy Econ 26:539–564

    Google Scholar 

  48. Rødseth KL (2011) Treatment of undesirable outputs in production analysis: desirable modeling strategies and applications Dissertation, Norwegian University of Life Sciences

  49. Rødseth KL (2013) Capturing the least costly way of reducing pollution: a shadow price approach. Ecol Econ 92:16–24

    Google Scholar 

  50. Shephard RW (1974) Indirect production functions. Anton Hain, Meisenhaven am Glan

  51. Shephard RW (1970) Theory of cost and production functions. Princeton University Press, Princeton

    Google Scholar 

  52. Shephard RW, Färe R (1974) The law of diminishing returns. Z Nationalokonomie 34:69–90

    Google Scholar 

  53. Stern NH (2007) The economics of climate change: the Stern review. Cambridge University Press, Cambridge

    Google Scholar 

  54. Swift B (2001) How environmental law works: an analysis of the utility sector’s response to regulations of nitrogen oxides and sulfur dioxide under the Clean Air Act. Tulane Environ Law J 14:309–424

    Google Scholar 

  55. Welch E, Barnum D (2009) Joint environmental and cost efficiency analysis of electricity generation. Ecol Econ 68:2336–2343

    Google Scholar 

Download references

Acknowledgments

The authors thank two anonymous referees for helpful comments. The usual disclaimer applies.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Kenneth Løvold Rødseth.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Rødseth, K.L., Romstad, E. Environmental Regulations, Producer Responses, and Secondary Benefits: Carbon Dioxide Reductions Under the Acid Rain Program. Environ Resource Econ 59, 111–135 (2014). https://doi.org/10.1007/s10640-013-9720-5

Download citation

Keywords

  • Abatement costs
  • Data envelopment analysis
  • Environmental regulation
  • Materials balance
  • Multiple pollutants
  • Secondary benefits