Environmental Policy and the Choice of Abatement Technique: Evidence from Coal-Fired Power Plants¤

This paper analyzes the impact of environmental policy instruments on the choice of pollution control techniques. I ̄rst recast the existing theoretical model of pollution abatement technology choice. Previous studies have found that the cost savings to a ̄rm that adopts a technical innovation in pollution control are greater under a market-based instrument, such as an emissions tax or tradeable permit system, than under a command-and-control instrument such as an emissions rate standard. I show that this result is more general than previously recognized: in particular, it holds whether the new technique is more capital intensive (as in previous models) or less capital intensive. Hence, the choice of technique by ̄rms should be more responsive to abatement costs under market-based instruments. I then provide an empirical test of the theoretical predictions, using data from sulfur dioxide regulation of coal̄red electric power plants. My principal ̄nding is that electric generating units sub ject to a tradeable permits regime were indeed more responsive to abatement costs than units under an emissions rate standard. That is, a given change in the average cost of scrubbing or coal-switching had a greater impact on the probability of scrubbing for units under the market-based regime. I also ̄nd that long-term coal contracts, regional location, and utility ownership class had signī cant e®ects on the choice of abatement technique.