Staff Paper No. 378 - Abstract
The Price of Pollution: A Dual Approach to Valuing SO2 Allowances
Under the 1990 Clean Air Act Amendments, a market-based scheme to reduce U.S. sulfur dioxide emissions will take effect in 1995. Early indications are that participation in the market will be light and that the price of an "allowance'' will be lower than was first expected. Using an output distance function approach, for a dataset of 14 Wisconsin coal-burning utility plants we estimate the shadow price of reducing SO2 emissions by one ton. This estimate can be interpreted as marginal abatement cost and should approximate the allowance price. The estimated average shadow price is considerably higher than the prices at which the few observed allowance trades have occurred. Wisconsin's stringent state SO2 legislation may explain a portion of this divergence.
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