Wednesday, January 29, 2014

The impact of environmental regulation on productivity: the case of electricity generation under the Clean Air Act Ammendment (CAAA)-1990

This paper measures the impact of the 1990 Clean Air Act Amendment on the productivity and output of US coal- red power generating units. The Act led to power units adopting a number of direct pollution abating behaviors, one of which was an input change to lower SO2 emitting coal. A key feature of coal generating units is each one is designed to burn a particular variety of coal, with significant deviations from the targeted coal characteristics resulting in productivity loss. The main innovation of my paper is to quantify the effect that switching to cleaner coal had on productivity, output, generation costs, and ultimately, the corresponding cost pass-through on prices. With data spanning over twenty one years, I first compute the ideal coal type of each unit in my sample and document ensuing deviations caused by switching to cleaner coal, finding deviations reaching magnitudes of over 30%. I then incorporate the effect of this deviation directly into a production function to explicitly quantify the resulting productivity loss. Estimated output losses range from 1% to 4%, varying across regions, over time, and mainly depending on the proximity of generating units to low-sulfur coalmines. Additional costs caused by the regulation were significant in magnitude, representing up to 11% of electricity price in one of the regions considered. Finally, certain evidence of cost pass-through to prices was observed in some regions.
John E. Amos coal-fired power plant in West Virginia, owned and operated by Appa
The John E. Amos coal-fired power plant in West Virginia, owned and operated by Appalachian Power, a subsidiary of American Electric Power (AEP)/
Credit: fotopedia via
by Pedro Hancevic; Department of Economics, University of Wisconsin-Madison
November 21, 2013 (Preliminary Draft); William H. Sewell Social Sciences Building, 1180; Observatory Drive Madison, WI 53706-1393. E-mail: Phone: +1(608)520-3765.
Keywords: productivity, production function, environmental regulation, sulfur, electricity, coal.

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