Emissions Trading, Electricity Industry Restructuring, and Investment in Pollution Abatement

This paper investigates the relationship between economic regulation and …rms’response to the incentives created by an emissions trading program. The NOx State Implementation Plan (SIP) Call Rule was designed to facilitate cost e¤ective reductions of nitrogen oxides emissions from large stationary sources (primarily electricity generators) in 19 eastern states. I estimate a discrete choice model of the …rm’s compliance decision that controls for unit-level variation in compliance costs and allows for correlation across choices made by the same plant manager. I use variation in state-level electricity industry restructuring activity to identify an e¤ect of electricity market regulation on generators’ environmental compliance strategy choices. I present evidence that asymmetries in economic regulation across states have resulted in a disproportionate amount of the mandated emissions reductions occurring in more regulated electricity markets; these are the areas least in need of pollution control.