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Optimal profits under environmental regulation: The benefits from emission intensity averaging

Benjamin Hampf and Kenneth Løvold Rødseth

No 220, Darmstadt Discussion Papers in Economics from Darmstadt University of Technology, Department of Law and Economics

Abstract: In this paper we analyze the economic effects of implementing EPA's newly proposed regulations for carbon dioxide (CO2) on existing U.S. coal-fired power plants using nonparametric methods on a sample of 144 electricity generating units. Moreover, we develop an approach for evaluating the economic gains from averaging emission intensities among the utilities' generating units, compared to implementing unit-specific performance standards. Our results show that the implementation of flexible standards leads to up to 2.7 billion dollars larger profits compared to the uniform standards. Moreover, we find that by adopting best practices, current profits can be maintained even if an intensity standard of 0.88 tons of CO2 per MWh is implemented. However, our results also indicate a trade-off between environmental and profit gains, since aggregate CO2 emissions are higher with emission intensity averaging than with uniform standards.

Keywords: environmental regulation; profit maximization; emission intensity averaging; nonparametric effciency analysis (search for similar items in EconPapers)
JEL-codes: D24 L50 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Date: 2014
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