How Large are the Cost Savings from Emissions Trading? An Evaluation of the U.S. Acid Rain Program

Emissions trading programs are designed to keep compliance costs low but studies on actual savings are limited. This paper is the first to conduct a comprehensive analysis of the cost savings from the Acid Rain Program (ARP), the largest emissions trading program implemented in the U.S.. I estimate a discrete choice model of coal procurement and scrubber installation to recover structural parameters of compliance cost functions at the generating unit level. Using the model, I predict compliance choices under a uniform emission standard that yields the same aggregate emissions as the ARP. I estimate cost savings under the ARP to be about 130-330 million (1995 USD) per year. The numbers are much smaller than in previous literature (Carlson et al., 2000; Ellerman et al., 2000). I propose that lower transport costs reduced cost heterogeneity across generating units, and that improvements in scrubbing technology and state policies may have also contributed to a decrease in cost savings.