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Technology adoption under time-differentiated market-based instruments for pollution control

Author

Listed:
  • Craig, Michael
  • McDonald-Buller, Elena
  • Webster, Mort
Abstract
Peak concentrations of ground-level ozone pose health risks to millions of U.S. citizens across the U.S. In order to reduce peak ozone concentrations, nitrogen oxide (NOx) emissions from the power sector, among others, have been regulated with technology-based standards or, more commonly in recent years, market-based instruments such as cap-and-trade programs. However, the lack of temporal flexibility in current designs of these market-based instruments limits their cost-effectiveness on days forecasted to have the highest levels of pollution, including ozone precursors such as NOx, and as further emission reductions are sought, the marginal cost of these approaches increases dramatically. In this paper, we compare three regulatory schemes for reducing NOx emissions on high-ozone days: time-differentiated pricing, which prices NOx emissions only on days with high-ozone concentrations; undifferentiated pricing, which represents current NOx emission regulations; and technology-based standards. We develop a novel model that captures for the first time both the short- and long-term response of generators, through redispatching and control technology adoption, to a dynamic pricing scheme such as time-differentiated pricing. Unlike prior studies on time-differentiated pricing, the heart of our model, a unit commitment model, accounts for inter-temporal constraints on power generation that may be crucial to accurately capturing the response of generators to a transient price signal. We apply this model to the Texas power system and find that while control technology adoption (specifically selective catalytic reduction) does occur at very high time-differentiated prices, time-differentiated pricing mainly affects emissions and costs through redispatching of gas- for coal-fired generation. Furthermore, we show that time-differentiated pricing, due to its targeted pricing mechanism, provides a more cost-effective approach than undifferentiated pricing or technology-based standards for reducing NOx emissions on high-ozone days, but is not cost-effective at reducing summer-wide NOx emissions. Our results illustrate the trade-offs between these regulatory approaches and suggest that states should consider dynamic pricing schemes such as time-differentiated pricing for achieving further reductions in peak ozone concentrations.

Suggested Citation

  • Craig, Michael & McDonald-Buller, Elena & Webster, Mort, 2016. "Technology adoption under time-differentiated market-based instruments for pollution control," Energy Economics, Elsevier, vol. 60(C), pages 23-34.
    • Handle: RePEc:eee:eneeco:v:60:y:2016:i:c:p:23-34
    DOI: 10.1016/j.eneco.2016.09.019
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    References listed on IDEAS

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    1. Steven A. Gabriel & Antonio J. Conejo & J. David Fuller & Benjamin F. Hobbs & Carlos Ruiz, 2013. "Complementarity Modeling in Energy Markets," International Series in Operations Research and Management Science, Springer, edition 127, number 978-1-4419-6123-5, December.
    2. Meredith Fowlie & Nicholas Muller, 2019. "Market-Based Emissions Regulation When Damages Vary across Sources: What Are the Gains from Differentiation?," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(3), pages 593-632.
    3. Krupnick, Alan & McConnell, Virginia & Stoessell, Terrell & Cannon, Matthew & Batz, Michael, 2000. "Cost-Effective NOx Control in the Eastern United States," RFF Working Paper Series dp-00-18, Resources for the Future.
    4. Robert N. Stavins, 1998. "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 69-88, Summer.
    5. Burtraw, Dallas & Evans, David, 2003. "The Evolution of NOx Control Policy for Coal-Fired Power Plants in the United States," RFF Working Paper Series dp-03-23, Resources for the Future.
    6. Tom Tietenberg, 1995. "Tradeable permits for pollution control when emission location matters: What have we learned?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 5(2), pages 95-113, March.
    7. Baldick, Ross & Baughman, Martin L., 2003. "An Oligopoly Simulation of a Restructured ERCOT: Will Future Prices Be Competitive?," The Electricity Journal, Elsevier, vol. 16(3), pages 59-71, April.
    8. Nicholas Z. Muller & Robert Mendelsohn, 2009. "Efficient Pollution Regulation: Getting the Prices Right," American Economic Review, American Economic Association, vol. 99(5), pages 1714-1739, December.
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    Cited by:

    1. Amir Zeighami & Jordan Kern & Andrew J. Yates & Paige Weber & August A. Bruno, 2023. "U.S. West Coast droughts and heat waves exacerbate pollution inequality and can evade emission control policies," Nature Communications, Nature, vol. 14(1), pages 1-13, December.

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    More about this item

    Keywords

    Emissions pricing; Time-differentiated pricing; Emission control technology installation decisions; Unit commitment; Emission abatement;
    All these keywords.

    JEL classification:

    • D79 - Microeconomics - - Analysis of Collective Decision-Making - - - Other
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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