UNCERTAINTY AND THE COST OF ACID RAIN CONTROL

Hadi Dowlatabadi and Winston Harrington

Contemporary Economic Policy, 1990, vol. 8, issue 3, 43-58

Abstract: This paper uses a utility capacity planning and dispatch model to examine the robustness of acid rain mitigation policies. The model meets electricity demand at the lowest economic cost while it responds to price or quantity signals for controlling emissions. The model is unique since it is couched in a risk analysis framework that captures the uncertainty in other economic parameters determining the utility's strategic choices–e.g., demand level and fuel prices. This permits one to compare various institutional settings for pollution control for both a world with perfect foresight and one with imperfect foresight. This exercise provides quantitative results on the cost of pollution control with price and quantity controls. It also provides a measure of the response of these cost functions to the uncertainty in other key parameters. Exploring the performance of various pollution control mechanisms has led to three findings: (i) that the performance of a price control mechanism is dependent on the level of emission reductions that one seeks, (ii) that regionally traded emission permits and emission fees are equally efficient regardless of the level of foresight, and (Hi) that emission fees lead to more stable electricity generation prices. Finally, the sensitivity analysis of the results under imperfect foresight suggest that uncertainties in the level of demand and load management success play an important role in determining future pollution control costs.

Date: 1990
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