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Acid deposition regulation and the US coal industry
Acid deposition regulation and the US coal industry Charles D. Kolstad
This paper concerns the debate over regulation of acid deposition in the USA. In essence, the debate has concerned striking an efficient balance among three conflicting goals: reducing acid-deposition effects, minimizing control costs and assuring a future for the high-sulphur coal industry. This paper focuses on the effects of acid rain regulation on the high-sulphur coal industry, using a model of the electric power and coal industries in the east and midwest. Our conclusion is that the two prominent regulatory proposals, forced scrubbing and an emission limit, are either inefficient or poorly balance the three policy goals. Furthermore, a limit of 1.2 pounds sulphur per million Btu of fuel seems to maximize deleterious effects on the high-sulphur coal industry. Tighter or weaker controls would be better for high-sulphur coal. Keywords:Acid rain; Coal industry; USA
Introduction Control of acid deposition has been one of the major air quality debates in the US Congress during the 1980s. Only with President Bush's 1989 proposal does it appear that the legislative deadlock may have been broken. The Bush bill proposes, among other things, a reduction in SO2 emissions by 2000 to 10 million tons below 1980 emission levels (for the eastern US). H e also proposes allowing trading of these emission rights. The legislative debate over acid rain has fundamentally been the conflict between who pays for pollution control and who benefits. This paper serves to illuminate these tradeoffs. The search for an acid-deposition control policy for North America has been a classic example of a Charles D. Kolstad is at the Institute for Environmental Studies and the Department of Economics, University of Illinois at Urbana-Champaign, Room 352, 1101 West Peabody Drive, Urbana, IL 61801-4723, USA.
0301-4215/90/090845-08 © 1990 Butterworth-Heinemann Ltd
search for a compromise among a variety of dramatically conflicting interests. While the scientific uncertainty associated with the effects of control of acid deposition has contributed, probably the principal reason for the policy standoff of the 1980s has been the political strength of a very few fundamentally conflicting interest groups. The call for aciddeposition control comes from many quarters but particularly from the northeast US and Canada. The apparent plight of Adirondacks lakes and northeastern forests has motivated northeastern political forces to seek control of acid deposition. Much of the deposition appears to be originating in the midwest, from older, uncontrolled power plants emitting large amounts of SO2. It is relatively expensive to control these sources and most of the benefits of control will probably not be realized by the midwesterners who pay for it. Efforts to pass all or part of these costs onto the country as a whole have been met with resistance. A third interest group with considerable power is the high-sulphur coal producers of the east and midwest. In many cases, the cheapest way to control SO2 is to burn low-sulphur coal; thus the high-sulphur coal producers see the potential for the decimation of their industry depending on the form of acid-deposition legislation. To a large degree, the current struggle over aciddeposition control parallels the debate over the new source performance standards in the 1970s. Originally these standards specified an upper limit on sulphur emission from new coal-fired power plants. In the late 1970s the high-sulphur coal industry, with help from environmentalists, was able to achieve a 'slight' modification of the standard to require scrubbers on all new coal-fired boilers, thus greatly reducing the shift away from high-sulphur coal, albeit at much higher cost.1 The current debate over acid-rain control is very similar except that existing sources (with high visibility and presumably more political power) are involved. The purpose of this paper is to quantify the objectives of these conflicting interest groups and further, to illuminate the tradeoffs implicit in acid845
Acid deposition regulation and the US coal industry
deposition control in order to foster compromise in the policy. In particular, what are the sacrifices in terms of cost and/or deposition associated with mollifying high-sulphur coal interests? Further, are the political solutions proposed in Congress efficient in terms of satisfying the goals of all three political groups? Are there control strategies or a set of strategies which are optimal in terms of balancing the gains (or losses) of the groups involved? Viewing the process of formulating an acceptable regulation as a bargaining problem, are there strategies which stand out as obvious solutions? As we show, there are interesting relationships between the apparent conflicting goals of these interest groups. For instance, very strict acid-deposition control may actually benefit the high-sulphur coal industry. In the next section of the paper we review the types of regulation which could be or are being proposed to control acid deposition in the USA. We then present a model of the electric power and coal industries in the eastern 31 states of the USA. This modei is used to evaluate the cost, deposition and coal-mining implications of the various regulations. Finally, we present an analysis of acid-deposition regulation based on the model.
Regulatory mechanisms Before analysing acid-deposition regulations it is useful to classify and categorize potential ways of legislatively controlling the problem. There are a variety of ways to control acid deposition, ranging from generic methods that have been described in the environmental economics literature, but rarely implemented in their pure form, to regulations modelled on existing legislation for other air pollutants. The most efficient, first-best, type of environmental regulation would involve controlling each source based on its marginal contribution to acid-deposition damage. However, damage per se is rarely discussed in an applied regulatory context, even by environmental economists. Generally a standard is defined setting forth an acceptable level of environmental quality (acid deposition in our case) at a particular location. Deposition in excess of the standard is deemed unacceptable. There are three basic types of regulation that can be used to protect the standard. The most efficient way of meeting a standard would be to control sources based on their marginal cont r i b u t i o n to d e p o s i t i o n . Such an ' a m b i e n t differentiated' or 'receptor-oriented' approach results in efficient emission levels. In contrast to this approach are 'emission-differentiated' or 'emissionoriented' regulations 2 where aggregate emissions are
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controlled in the most efficient manner to meet the deposition standard, but where sources are not treated differently based on their location. For example, a uniform emission tax would be such a regulation. As the tax is raised, aggregate emissions will presumably fall. But since the tax is uniform, all sources control to the same marginal cost; it is not possible to single out those sources that are causing the most deposition. Bringing up the rear in terms of efficiency are the various legislative proposals which have been or are being considered by the US Congress. While these proposals do generally result in reduced emissions, they are relatively ad hoc in that it is unclear how efficiently they reduce emissions and how efficiently they ameliorate the distributional problems associated with regulation. In contrast to the 1970 Clean Air Act (CAA), which called upon the Environment Protection Agency (EPA) to determine acceptable levels of pollution necessary to protect the environment and then oversee the promulgation of regulations to achieve those standards, all of the bills introduced into Congress to control acid deposition have specified the level of emission reduction and, at least to some extent, how it shall be achieved. Two basic types of bills have been introduced in Congress for the control of acid deposition. These are aside from the several bills calling for more research and development with no control at the present time. These two classes of bills reflect the makeup of the Committees and Subcommittees which must report out those bills. The Environment and Public Works Committee has jurisdiction in the Senate. That Committee consists primarily of eastern and western senators. Thus Senate bills (Stafford and Mitchell have been primary sponsors) have called for a significant reduction in SOz and NO× in a fairly cost-effective manner, without attention to midwestern interests; ie with no protection of the high-sulphur coal industry nor subsidies for utility clean-up. Dowlatabadi and Harrington, among others, call these bills 'fuelswitching bills'. 3 President Bush's proposal is of this type. In contrast, the House Subcommittee on Health and Environment has a very heavy representation from the midwest. Thus, most bills introduced in the House have had provisions to ameliorate adverse impacts on the midwest. The Waxman-Sikorski bill called for forced flue-gas desulphurization (thus protecting high-sulphur coal producers) and the financing of clean-up costs by an electricity tax on all electricity produced in the USA. Even these sweeteners were not enough for the bill to be voted
ENERGY POLICY November 1990
Acid deposition regulation and the US coal industry
out of committee. (It was narrowly defeated in 1984). The 1986 Sikorski-Conte acid-rain bill has eliminated the requirement of forced scrubbing and weakened the financing to reimburse states only if power costs should rise by over 10% due to acid-rain control. To read between the lines, this backstop subsidy would make it easier for some states to require scrubbing, which they would be permitted to do under the bill. The current (1990) House bill has eliminated technology requirements but retains subtle subsidies to scrubbing such as granting extra emission permits (to trade) to sources using scrubbers.
A simple model of regulation In order to address the efficiency and distributional issues raised earlier, it is necessary to have an economic model that can gauge the economic and environmental effects of acid-deposition regulation and be able to resolve these effects on different interest groups and regions of the country. This is no small task, particularly considering the fact that much of the effect of proposed legislation will occur five, ten or more years in the future. There have been a number of detailed analyses of the effects of proposed acid-rain legislation. 4 Most of these analyses focus on the electric utility industry, and how that industry is expected to evolve over the coming decades. These studies use different approaches; the CBO, ICF and O'Brien et al analyses are based on large computer models of the coal and electric power industry whereas the Streets et al analysis focuses more directly on pollution control costs. The Streets et al study appears to be based on the same set of data as the 1984 study by the O T A . Nevertheless, three basic conclusions emerge from these studies. One conclusion of these studies is that if utilities are free to choose how they reduce sulphur emission, then they will generally choose low-sulphur coal with significant deliterious impact on the highsulphur coal industry. ICF projects that under such a regulation, midwestern (high-sulphur) coal production in the year 2000 would be a third of its otherwise expected level. 5 CBO projects an even more substantial reduction. 6 A second result of these analyses of acid-rain legislation is that helping high-sulphur coal producers by prohibiting fuel switching (ie requiring scrubbing) is costly; in some analyses, very costly. Streets et al indicate additional costs of 0.37-1.01 billion dollars per year. 7 ICF shows similar incremental costs - on the order of a billion dollars annually. 8
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The O T A projects additional costs of 0.5-1.7 billion dollars annually, depending on the extent of overall sulphur emissions reduction. 9 A third result of these studies is that by allowing trading of rights to emit, significant cost savings can be achieved. Streets et al show that simply allowing the trading of rights to emit among states, on a one-to-one basis, cuts costs of the acid-rain bills by more than half, saving up to 8 billion dollars per year. i° More sophisticated trading, based on a source's effect on acid deposition in the Adirondacks, could reduce costs by as much as 50% again. In other words, allowing receptor-oriented trading of emission rights could reduce the costs of acid-rain regulation to a quarter of what it would otherwise be. Most of the analyses of acid-deposition control have examined specific bills. The focus of this paper is on the effect of acid-deposition control generically. We are primarily interested in the effect of acid-deposition control on the US coal industry, a question which has been inadequately treated by other authors. To examine the effects of acid-deposition regulations, we develop a simple model of electric utility response to sulphur emission regulations. In this section we will describe such a model which simulates i n d u s t r y ' s r e s p o n s e to p a r t i c u l a r aciddeposition regulations. Thus it will be possible to look at changes in high-sulphur coal production and emission control costs as a function of the level of deposition control. Unfortunately, we must limit the scope of the model somewhat for tractability. In particular, we will consider sulphur pollution from coal-fired electric power production and the effect of such pollution on acid deposition in the Adirondacks of New Y o r k State. T h e s e are not terribly restrictive assumptions since sulphur seems to be the most critical pollutant 11 and electric utilities produce a very large proportion of the sulphur emitted in the eastern USA. Further, acid-deposition damage in the Adirondacks has probably received the most attention to date, at least in terms of lake acidification in North America. Other authors also focus on the Adirondacks. Our singling out of the Adirondacks is more of a convenience to illustrate our approach than a suggestion that acid deposition is nowhere else a problem. Because most of the proposals for acid-deposition control do not have any effects until the 1990s at the earliest, the appropriate way to evaluate regulations is within the context of industry as one expects it to be five, ten or more years hence. This is a complex
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Acid deposition regulation and the US coal industry task inevitably involving a large degree of uncertainty. We will take the easier, hopefully clearer - but potentially less accurate - approach of looking at the electric utility industry of 1981 and asking what it would have looked like if it had been subject to one or another acid-deposition regulation. One advantage of this is that we eliminate the uncertainty of having to guess what the industry will look like in 1995 or 2000. The disadvantage is that, inevitably, over the coming years new, 'clean' generating capacity will become operable, possibly displacing some of the 'dirty' coal capacity supposedly causing the aciddeposition problem. 12 However, the nature and extent of such shifts in the electric utility industry are highly uncertain. Our approach then is to focus on the year 1981. More specifically, we look at coal-fired electricity generating equipment operating in the year 1981 in the 31 states of the USA east of or bordering on the River Mississippi. This half of the country is typically singled out in acid-deposition legislation since essentially all high-sulphur coal is burned in this region and nearly all unscrubbed coal-fired power plants are located there. Our approach is to develop a simple model of fuel and flue-gas desulphurization (FGD) capital choice and thus, by implication, SO2 emissions for coal-fired power plants in the 31-state region. The model operates by determining the most efficient way for the 1981 utility industry to respond to particular environmental regulations. Given the prices and qualities of coal prevailing in the USA in 1981, and the estimated cost of transporting that coal, we assume that utilities will buy the cheapest coal so that environmental standards are met and the output of coal-based electricity is maintained. In meeting environmental standards, many utilities will typically face a choice between cheap, high-sulphur coal and more expensive low-sulphur coal. Of course, utilities may install flue-gas desulphurization equipment and burn high-sulphur coal if that turns out to be cheapest or is required by environmental regulations. And for the few plants with scrubbers already in place in 1981, the choice is even more straightforward: burn the cheapest coal regardless of quality since the scrubber will generally guarantee that the environmental regulation is met. The model chooses a spatial distribution of coal use and a spatial distribution of investments in scrubbing capital so that 1981 coal-fired electricity generation by state is produced at least-cost while meeting environmental regulations. The model then estimates how the utility industry responds to environmental regulation. The other
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side of that coin is the effect of various regulations on acid deposition. If one knows the spatial distribution of emissions resulting from a particular regulation, then this question boils down to representing the relationship between emissions and acid deposition. As is well known, this relationship is subject to a great deal of uncertainty. 13 Not only is there uncertainty about where acid deposition causes the most harm but also uncertainty as to where a unit of emissions is eventually deposited. As mentioned earlier, we focus on acid deposition in the Adirondacks. We skirt the issue of the emissions-deposition relationship by using the detailed estimates of this relationship published by the U S A - C a n a d a joint governmental study of acid deposition. Although the US Government subsequently disowned the study, 14 source-receptor relationships for eight state-of-theart atmospheric transport models are reported, 15 allowing the reader to draw conclusions about both the consensus and uncertainty surrounding this relationship. The source-receptor relationship is summarized by a set of transfer coefficients, one for each source location, giving the amount of acid deposition in the Adirondacks that results from a unit of emissions of sulphur from that source location. Thus if a represents the vector of transfer coefficients then the acid deposition resulting from a vector of emission, e, is given by a'e, a scaler. We have used the mean transfer matrices from the USA-Canada study as our best estimate of the relationship between sulphur emissions and sulphur-related acid deposition. Four types of acid-rain regulation are considered here, using this model of regulation. Two are modelled after bills which have been considered in Congress whereby sulphur emission reductions are mandated and, in one of the two cases, the method of emission reduction is required to be flue-gas desulphurization. The other two types of regulations are generic-receptor-oriented and emission-oriented controls. Receptor-oriented regulation corresponds to the case where sources are controlled in the most efficient manner to satisfy an acid deposition upper limit. Emission-oriented controls are the most efficient controls to satisfy an upper limit on aggregate regional sulphur emissions. Receptor-oriented controls represent the most efficient way of achieving a deposition standard. Emission-oriented controls are somewhat less efficient but are simpler (in that source-receptor transfer coefficients need not be directly considered). In the next section of the paper we will examine the performance of these various regulations.
ENERGY POLICY November 1990
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Figure 1. The cost of acid deposition control. Results In examining the various possible ways of regulating acid deposition, three criteria are of primary interest. One is cost. How much will the regulation cost in terms of resource outlays for pollution control? A second criterion is output of high-sulphur coal. How much will production change as a result of regulation? A third criterion is acid-deposition effects. Consider first the most efficient way of controlling acid deposition. Figure 1 presents annual costs 16 for efficient acid-deposition control, as a function of the level of acid deposition. Just over 10 units (Kg S/hectare/yr) of deposition in the Adirondacks corresponds to current deposition, at least in terms of the model. 17 No additional control is needed to achieve this level. As lower deposition rates are required, costs go up, slowly at first, but then rather rapidly as lower and lower deposition rates are sought. In other words, marginal control costs for acid deposition are relatively low over a wide range before rising as the deposition constraint becomes tighter. The implication of this is that even if the marginal damage from acid deposition is relatively modest, significant control may still be warranted, given the low marginal costs of control over a wide range. The line above the efficient frontier corresponds to emission-oriented controls. The line represents the least-cost way of achieving the various deposition rates given that sources are freely able to trade-off controls in one location with controls in another location on a one-to-one basis. Note that for relatively low control of deposition, emissionoriented regulations are fairly efficient. However, for moderate Levels of deposition, the emissionoriented controls result in substantially higher costs for the same level of deposition. For very low deposition rates, the inefficiency decreases, modest-
ENERGY P O l i C Y November 1990
ly in absolute terms but significantly in relative terms. However, for all deposition rates, the additional costs of these second-best regulations are less than $1 billion per year and often less than $500 million per year. Figure 1 can be compared to the lower two lines of Figure 2 in Streets et al. 18 Our costs would be expected to be lower (and they are) because we focus on coal combustion and utilities only, excluding all other sources of sulphur emissions, and because we consider 1981 rather than a later year. The two stylized acid-rain control bills perform in remarkably different ways. As mentioned earlier, we consider two cases. One case is where all sources must scrub SO2 to achieve 90% removal rates or better. The other case is where all sources may emit no more than 1.2 lbs of SO2 per million Btu of fuel use. Both of these limits are commonly found in legislation before Congress, although our requirement that all plants scrub at 90% is somewhat stricter because legislation generally only requires scrubbers to the extent necessary to achieve the mandated emission reduction. The 1.2 emissions limit results in sulphur dioxide emissions of 5.5 million tons (compared to the base case emissions of 17 million tons). As a variant on this case, we consider the case where sources are allowed to trade rights to emit on an interstate basis, so long as total emissions remain at 5.5 million tons. These cases are shown in Figure 1. The required scrubbing case results in low levels of acid deposition, about half the deposition associated with the 1.2 limit case. However the costs are enormous, not only between the two cases but relative to what is efficient. The same deposition levels as are achieved with forced scrubbing could be achieved at $3 billion per year less. And even if emission-oriented controls were pursued, over $2 billion could be saved annually. The 1.2 limit results in higher deposition at less cost. But more importantly, the 1.2 limit is more efficient. The 1.2 limit is very close in performance terms to emission-oriented controls, although it is nearly $1 billion per year more costly than efficient controls. Interestingly, very little gain in efficiency can be associated with allowing interstate trades. Both the with and without trade cases are similarly close to the emission-oriented control line and similarly distant from the efficient frontier. By allowing trades, costs are cut somewhat but deposition is increased in return. Turning to coal production, Figure 2 indicates the production of high sulphur coal 19 as a function of the acid-deposition rate. There are two interesting features of this Figure. One is that emission-oriented
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Figure 2. The effects on the high-sulphur coal industry of acid deposition control. controls have significantly greater impact on highsulphur coal production than do efficient controls. Thus, efficient controls not only cost less but have less impact on high-sulphur coal production. The principal reason for this is that while high-sulphur coal production is responsible for much of the emission problem, control of deposition requires greater attention to sources close to the Adirondacks. Highsulphur coal burned in Florida contributes little to acid deposition in the Adirondacks; however, with emission-oriented controls, sulphur emissions in Florida can be traded on a one-to-one basis with emissions in New York State. The second interesting thing to note is that under both emission-oriented and efficient controls, as deposition is reduced, high-sulphur coal production first decreases and then increases, and for very low deposition rates is actually higher than with no control. The reason for this is that for modest control levels, the optimal strategy for a firm to follow is fuel-switching - to use low-sulphur coal instead of high-sulphur coal. However, as emission regulations get tighter and tighter, it becomes cheaper to install scrubbers and use cheap high-sulphur coal. And with scrubbers installed, coal with even higher sulphur levels than the base case can be used since SIP regulations will be trivially satisfied. It should be noted that this effect would be moderated somewhat in actuality since here we assume no upper limit on scrubber efficiency. This 'reswitching' can be seen from Figure 3, where the hypothetical case of a utility in Ohio is considered. Low-sulphur and high-sulphur coal is available as is a scrubber. Scrubbing costs are from Atkinson. 2° No upper limit on removal rates is assumed in our analysis (90-95% is frequently considered a working upper limit). The Figure shows the costs (per unit of fuel used) of scrubbers and fuel to achieve the indicated emission level. Point A corresponds to the use of low-sulphur coal alone with no scrubbing; point B represents the sole use of high850
sulphur coal. Line AB represents the use of a blend. Point C represents the use of high-sulphur coal with a 90% scrubber. Line BCE represents high-sulphur coal use with various levels of scrubbing. Line A D F represents the same for low-sulphur coal. 21 Note that as the emission constraint is tightened, it first becomes desirable to blend high- and low-sulphur coal. Then partially scrubbed western coal becomes desirable. For tighter emission levels, it pays to scrub even more and use high-sulphur coal. If an upper limit on removal rates were assumed, then for the tightest control, scrubbed low-sulphur coal would be used. But barring this situation, scrubbed high-sulphur coal would be the cheapest way of meeting a stringent emission limit. Another way of looking at this is that without a scrubber, the 33-cent premium on low-sulphur coal buys 2.24 lbs less sulphur emissions, relative to high-sulphur coal. But with 90% scrubbing, the premium only buys 0.224 lb lower sulphur emissions. Returning to Figure 2, there is a certain amount of irony that the case of a 1.2 lb limit on unit SO2 emissions lies at the bottom of the acid depositionhigh sulphur coal production curve. It is as if the regulation were chosen to have maximum impact on high-sulphur coal production. Tighter or looser emission-oriented controls would have less impact. In contrast, the required scrubbing alternative
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Figure 3. Control options as a function of emission rates. ENERGY POLICY November 1990
Acid deposition regulation and the US coal industry appears to be a way of causing a boom in highsulphur coal production. High-sulphur coal production is 50% higher than in the base case. If efficient controls were used, the same level of deposition could be achieved but with only modest restriction of high-sulphur coal output.
Conclusions The first point to reiterate is that by examining 1981 we have not examined the actual effects of an acid-deposition regulation put in place for the 1990s and beyond. Also, we have only examined an Adirondacks receptor; other areas are also sensitive to acid deposition. Thus, while we believe the conclusions qualitatively reflect the effects of various regulations, they should not be applied directly to shaping legislation which would apply to the utility industry in the 1990s and beyond. More sophisticated analysis should be used for that purpose. We have seen that the two most discussed proposals for controlling deposition - forced scrubbing and an emissions cap - have dramatically different effects. Forced scrubbing results in low acid deposition but at very high cost - much higher than necessary to achieve the same level of deposition. As expected, forced scrubbing does not damage highsulphur coal producers; in fact it is a tremendous boon to those producers, resulting in a 50% increase in production over the no-additional-control case. In contrast, the regulation limiting SO2 emissions to 1.2 lbs per 106 Btu of fuel, devastates the high-sulphur coal industry. In fact, it would be hard to design a regulation that is more damaging to the industry. However, the cost to society as a whole with the 1.2 limit is much more modest than the forced scrubbing regulation, although the acid-deposition protection is also more modest. Perhaps more important is that the 1.2 limit is much more efficient than forced scrubbing in terms of being closer to the efficient frontier of acid deposition v control costs, although it still is nearly $1 billion per year more costly than necessary. An actual regulation might be a hybrid, using efficient control for acid deposition combined with a compensation scheme for displaced coal miners. Another set of conclusions concerns the relative performance of emission-oriented v efficient (or receptor-oriented) regulations. Emission-oriented regulations are considerably more costly than efficient regulations, particularly in the middle-range of acid-deposition levels, costing $500-750 million per year more than efficient regulations. In addition, emission-oriented regulations have much more se-
ENERGY POLICY November 1990
rious impacts on high-sulphur coal producers than do efficient regulations. In summary, efficient, receptor-oriented regulations are markedly superior to either emissionoriented regulations, forced scrubbing or the 1.2 limit on both cost grounds and impacts on highsulphur coal producers. Furthermore, regulations to achieve relatively low or high levels of deposition are superior in terms of dislocation to the high-sulphur coal industry. It might be that the most politically tractable way of controlling acid rain is with strict, but cost-effective, regulations. A full technical explanation of the acid-deposition regulation model presented in the text is available from the author. Able computational assistance was provided by Gang Yi and is gratefully acknowledged. I thank Dan Golumb for interesting and useful conversations and Roger Morris, Dwaine Wentors and Curtis Moore for providing invaluable historical information on the acid deposition regulatory debate. Comments on an earlier draft of this paper from Dan Golumb, Don Hanson and Paul Portney are much appreciated. Earlier versions of this paper were presented at the November 1984 meeting of the International Association of Energy Economists in San Francisco and the December 1984 meeting of the American Economic Association in Dallas. 1 See B.A. Ackerman and W.T. Hassler, Clean Coal Dirty Air, Yale University Press, New Haven, CT, USA, 1981, for a fascinating account of the politics behind the revised new source performance standard. : T.H. Tietenberg, 'Transferable discharge permits and the control of stationary source air pollution: a survey and synthesis', Land Economics, Vol 56, No 4, 1980, pp 391-416; T.H. Tietenberg, 'Spatially differentiated air pollutant emission charges: an economic and legal analysis', Land Economics, Vol 54, 1978, pp 265-277; S.E. Atkinson and T.H. Tietenberg, 'Bilateral sequential trading and the cost-effectiveness of the bubble policy', 1990, unpublished. 3 H. Dowlatabadi and W. Harrington, 'Policies for the mitigation of acid rain', Energy Policy, Vol 17, 1989, pp 116-122. 4 Congressional Budget Office, Curbing Acid Rain: Cost, Budget and Coal-Market Effects, Washington, DC, USA, June 1986; op cit, Ref 3; D. Golumb, J.A. Fay, and S. Kumar, 'Seasonal, episodic and targeted control of sulfate deposition', APCA Journal, Vol 36, 1986, pp 798-802; J. Fay, D. Golumb and J. Gruhl, Controlling Acid Rain, Energy Lab Report MIT-EL-83-004, Massachusetts Institute of Technology, Cambridge, MA, USA, 1983; D.G. Streets, D.A. Hanson and L.D. Carter, 'Targeted strategies for control of acid deposition', Journal of the Air Pollution Control Association, Vol 34, No 12, 1984, pp 1187-1197; Office of Technology Assessment, Acid Rain and Transported Air Pollutants: Implications for Public Policy, Report OTA-O-204, US Congress, Washington, DC, USA, June 1984; ICF Inc, Analysis of Senate Emission Reduction Bill (S-3041), prepared for Office of Policy Analysis, Office of Policy and Resource Management, Environmental Protection Agency, Washington, DC,
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Acid deposition regulation and the US coal industry USA, February 1983; ICF Inc, Analysis of Cost-Effective, Phased-in Reduction of Sulphur Dioxide Emissions, prepared for Alliance for Clean Energy, Washington, DC, USA, February 1984; ICF Inc, Analysis of EDF's Acid Rain Control Proposal, memorandum to EPA, Washington, DC, USA, 19 May 1989; B. O'Brien, A. Fuldner, M. Paull, T. Petersik and S. Kanhouwa, Impacts of the Proposed Clean Air Act Amendments of 1982 on the Coal and Electric Utility Industries, Report DOE/EIA-0407, US Department of Energy, Washington, DC, USA, June 1983. 5 ICF Inc, 1989, op cit, Ref 4. 6 Congressional Budget Office, 1986, op cit, Ref 4. 7 Streets et al, 1984, op cit, Ref 4. 8 ICF Inc, 1983, op cit, Ref 4. 9 Office of Technology Assessment, 1984, op cit, Ref 4. x0 Streets et al, 1984, op cit, Ref 4. 11 Office of Technology Assessment, 1984, op cit, Ref 4. lZ The existence of new capacity per se is less important than how the operation of the 'dirty' capacity is affected by new cheaper capacity, new electricity demand and retirements of older capacity. 13 See National Research Council, Acid Deposition: Atmospheric Processes in Eastern North America, National Academy Press, Washington DC, USA, 1983. 14 Needless to say, there was a great deal of politics involved in the joint study. A major reason put forward by
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the Reagan administration for postponing acid-deposition control legislation was that not enough was known about acid deposition. It thus became difficult for the US ~5overnment to support a study suggesting otherwise. F.A. Schiermeir and P.K. Misra, Final Report, Technical Basis, Report No 2 F-M of Regional Modeling Subgroup of Work Group 2, established under USA-Canada Memorandum of Intent on Transboundary Air Pollution, Ottawa, Canada, November 1982. 16 These are incremental costs, over and above the costs associated with no acid deposition control, although including existing (1981) air regulations. 17 This compares to measured 1981 wet deposition of 11.7 Kg S/hectare (see Streets et al, 1984, op cit, Ref 4) which is quite a good match since electric utilities are not the only source of SO2. 18 Streets et al, 1984, op cit, Ref 4. 19 Defined here as the total amount of coal produced for electricity generation in Illinois, Indiana, Ohio, West Kentucky, Northern West Virginia and Western Pennsylvania (Bureau of Mines Coal-Producing Districts 2, 3, 4, 6, 9, 10, 11). e0 S.E. Atkinson, 'Marketable pollution permits acid rain externalities', Canadian Journal of Economics, Vol 16, No 4, 1983, pp 704-722. 21 Partial scrubbing of blended coal is not shown in the figure.
ENERGY POLICY November 1990
This paper concerns the debate over regulation of acid deposition in the USA. In essence, the debate has concerned striking an efficient balance among three conflicting goals: reducing acid-deposition effects, minimizing control costs and assuring a future for the high-sulphur coal industry. This paper focuses on the effects of acid rain regulation on the high-sulphur coal industry, using a model of the electric power and coal industries in the east and midwest. Our conclusion is that the two prominent regulatory proposals, forced scrubbing and an emission limit, are either inefficient or poorly balance the three policy goals. Furthermore, a limit of 1.2 pounds sulphur per million Btu of fuel seems to maximize deleterious effects on the high-sulphur coal industry. Tighter or weaker controls would be better for high-sulphur coal. Keywords:Acid rain; Coal industry; USA
Introduction Control of acid deposition has been one of the major air quality debates in the US Congress during the 1980s. Only with President Bush's 1989 proposal does it appear that the legislative deadlock may have been broken. The Bush bill proposes, among other things, a reduction in SO2 emissions by 2000 to 10 million tons below 1980 emission levels (for the eastern US). H e also proposes allowing trading of these emission rights. The legislative debate over acid rain has fundamentally been the conflict between who pays for pollution control and who benefits. This paper serves to illuminate these tradeoffs. The search for an acid-deposition control policy for North America has been a classic example of a Charles D. Kolstad is at the Institute for Environmental Studies and the Department of Economics, University of Illinois at Urbana-Champaign, Room 352, 1101 West Peabody Drive, Urbana, IL 61801-4723, USA.
0301-4215/90/090845-08 © 1990 Butterworth-Heinemann Ltd
search for a compromise among a variety of dramatically conflicting interests. While the scientific uncertainty associated with the effects of control of acid deposition has contributed, probably the principal reason for the policy standoff of the 1980s has been the political strength of a very few fundamentally conflicting interest groups. The call for aciddeposition control comes from many quarters but particularly from the northeast US and Canada. The apparent plight of Adirondacks lakes and northeastern forests has motivated northeastern political forces to seek control of acid deposition. Much of the deposition appears to be originating in the midwest, from older, uncontrolled power plants emitting large amounts of SO2. It is relatively expensive to control these sources and most of the benefits of control will probably not be realized by the midwesterners who pay for it. Efforts to pass all or part of these costs onto the country as a whole have been met with resistance. A third interest group with considerable power is the high-sulphur coal producers of the east and midwest. In many cases, the cheapest way to control SO2 is to burn low-sulphur coal; thus the high-sulphur coal producers see the potential for the decimation of their industry depending on the form of acid-deposition legislation. To a large degree, the current struggle over aciddeposition control parallels the debate over the new source performance standards in the 1970s. Originally these standards specified an upper limit on sulphur emission from new coal-fired power plants. In the late 1970s the high-sulphur coal industry, with help from environmentalists, was able to achieve a 'slight' modification of the standard to require scrubbers on all new coal-fired boilers, thus greatly reducing the shift away from high-sulphur coal, albeit at much higher cost.1 The current debate over acid-rain control is very similar except that existing sources (with high visibility and presumably more political power) are involved. The purpose of this paper is to quantify the objectives of these conflicting interest groups and further, to illuminate the tradeoffs implicit in acid845
Acid deposition regulation and the US coal industry
deposition control in order to foster compromise in the policy. In particular, what are the sacrifices in terms of cost and/or deposition associated with mollifying high-sulphur coal interests? Further, are the political solutions proposed in Congress efficient in terms of satisfying the goals of all three political groups? Are there control strategies or a set of strategies which are optimal in terms of balancing the gains (or losses) of the groups involved? Viewing the process of formulating an acceptable regulation as a bargaining problem, are there strategies which stand out as obvious solutions? As we show, there are interesting relationships between the apparent conflicting goals of these interest groups. For instance, very strict acid-deposition control may actually benefit the high-sulphur coal industry. In the next section of the paper we review the types of regulation which could be or are being proposed to control acid deposition in the USA. We then present a model of the electric power and coal industries in the eastern 31 states of the USA. This modei is used to evaluate the cost, deposition and coal-mining implications of the various regulations. Finally, we present an analysis of acid-deposition regulation based on the model.
Regulatory mechanisms Before analysing acid-deposition regulations it is useful to classify and categorize potential ways of legislatively controlling the problem. There are a variety of ways to control acid deposition, ranging from generic methods that have been described in the environmental economics literature, but rarely implemented in their pure form, to regulations modelled on existing legislation for other air pollutants. The most efficient, first-best, type of environmental regulation would involve controlling each source based on its marginal contribution to acid-deposition damage. However, damage per se is rarely discussed in an applied regulatory context, even by environmental economists. Generally a standard is defined setting forth an acceptable level of environmental quality (acid deposition in our case) at a particular location. Deposition in excess of the standard is deemed unacceptable. There are three basic types of regulation that can be used to protect the standard. The most efficient way of meeting a standard would be to control sources based on their marginal cont r i b u t i o n to d e p o s i t i o n . Such an ' a m b i e n t differentiated' or 'receptor-oriented' approach results in efficient emission levels. In contrast to this approach are 'emission-differentiated' or 'emissionoriented' regulations 2 where aggregate emissions are
846
controlled in the most efficient manner to meet the deposition standard, but where sources are not treated differently based on their location. For example, a uniform emission tax would be such a regulation. As the tax is raised, aggregate emissions will presumably fall. But since the tax is uniform, all sources control to the same marginal cost; it is not possible to single out those sources that are causing the most deposition. Bringing up the rear in terms of efficiency are the various legislative proposals which have been or are being considered by the US Congress. While these proposals do generally result in reduced emissions, they are relatively ad hoc in that it is unclear how efficiently they reduce emissions and how efficiently they ameliorate the distributional problems associated with regulation. In contrast to the 1970 Clean Air Act (CAA), which called upon the Environment Protection Agency (EPA) to determine acceptable levels of pollution necessary to protect the environment and then oversee the promulgation of regulations to achieve those standards, all of the bills introduced into Congress to control acid deposition have specified the level of emission reduction and, at least to some extent, how it shall be achieved. Two basic types of bills have been introduced in Congress for the control of acid deposition. These are aside from the several bills calling for more research and development with no control at the present time. These two classes of bills reflect the makeup of the Committees and Subcommittees which must report out those bills. The Environment and Public Works Committee has jurisdiction in the Senate. That Committee consists primarily of eastern and western senators. Thus Senate bills (Stafford and Mitchell have been primary sponsors) have called for a significant reduction in SOz and NO× in a fairly cost-effective manner, without attention to midwestern interests; ie with no protection of the high-sulphur coal industry nor subsidies for utility clean-up. Dowlatabadi and Harrington, among others, call these bills 'fuelswitching bills'. 3 President Bush's proposal is of this type. In contrast, the House Subcommittee on Health and Environment has a very heavy representation from the midwest. Thus, most bills introduced in the House have had provisions to ameliorate adverse impacts on the midwest. The Waxman-Sikorski bill called for forced flue-gas desulphurization (thus protecting high-sulphur coal producers) and the financing of clean-up costs by an electricity tax on all electricity produced in the USA. Even these sweeteners were not enough for the bill to be voted
ENERGY POLICY November 1990
Acid deposition regulation and the US coal industry
out of committee. (It was narrowly defeated in 1984). The 1986 Sikorski-Conte acid-rain bill has eliminated the requirement of forced scrubbing and weakened the financing to reimburse states only if power costs should rise by over 10% due to acid-rain control. To read between the lines, this backstop subsidy would make it easier for some states to require scrubbing, which they would be permitted to do under the bill. The current (1990) House bill has eliminated technology requirements but retains subtle subsidies to scrubbing such as granting extra emission permits (to trade) to sources using scrubbers.
A simple model of regulation In order to address the efficiency and distributional issues raised earlier, it is necessary to have an economic model that can gauge the economic and environmental effects of acid-deposition regulation and be able to resolve these effects on different interest groups and regions of the country. This is no small task, particularly considering the fact that much of the effect of proposed legislation will occur five, ten or more years in the future. There have been a number of detailed analyses of the effects of proposed acid-rain legislation. 4 Most of these analyses focus on the electric utility industry, and how that industry is expected to evolve over the coming decades. These studies use different approaches; the CBO, ICF and O'Brien et al analyses are based on large computer models of the coal and electric power industry whereas the Streets et al analysis focuses more directly on pollution control costs. The Streets et al study appears to be based on the same set of data as the 1984 study by the O T A . Nevertheless, three basic conclusions emerge from these studies. One conclusion of these studies is that if utilities are free to choose how they reduce sulphur emission, then they will generally choose low-sulphur coal with significant deliterious impact on the highsulphur coal industry. ICF projects that under such a regulation, midwestern (high-sulphur) coal production in the year 2000 would be a third of its otherwise expected level. 5 CBO projects an even more substantial reduction. 6 A second result of these analyses of acid-rain legislation is that helping high-sulphur coal producers by prohibiting fuel switching (ie requiring scrubbing) is costly; in some analyses, very costly. Streets et al indicate additional costs of 0.37-1.01 billion dollars per year. 7 ICF shows similar incremental costs - on the order of a billion dollars annually. 8
ENERGY POLICY November 1990
The O T A projects additional costs of 0.5-1.7 billion dollars annually, depending on the extent of overall sulphur emissions reduction. 9 A third result of these studies is that by allowing trading of rights to emit, significant cost savings can be achieved. Streets et al show that simply allowing the trading of rights to emit among states, on a one-to-one basis, cuts costs of the acid-rain bills by more than half, saving up to 8 billion dollars per year. i° More sophisticated trading, based on a source's effect on acid deposition in the Adirondacks, could reduce costs by as much as 50% again. In other words, allowing receptor-oriented trading of emission rights could reduce the costs of acid-rain regulation to a quarter of what it would otherwise be. Most of the analyses of acid-deposition control have examined specific bills. The focus of this paper is on the effect of acid-deposition control generically. We are primarily interested in the effect of acid-deposition control on the US coal industry, a question which has been inadequately treated by other authors. To examine the effects of acid-deposition regulations, we develop a simple model of electric utility response to sulphur emission regulations. In this section we will describe such a model which simulates i n d u s t r y ' s r e s p o n s e to p a r t i c u l a r aciddeposition regulations. Thus it will be possible to look at changes in high-sulphur coal production and emission control costs as a function of the level of deposition control. Unfortunately, we must limit the scope of the model somewhat for tractability. In particular, we will consider sulphur pollution from coal-fired electric power production and the effect of such pollution on acid deposition in the Adirondacks of New Y o r k State. T h e s e are not terribly restrictive assumptions since sulphur seems to be the most critical pollutant 11 and electric utilities produce a very large proportion of the sulphur emitted in the eastern USA. Further, acid-deposition damage in the Adirondacks has probably received the most attention to date, at least in terms of lake acidification in North America. Other authors also focus on the Adirondacks. Our singling out of the Adirondacks is more of a convenience to illustrate our approach than a suggestion that acid deposition is nowhere else a problem. Because most of the proposals for acid-deposition control do not have any effects until the 1990s at the earliest, the appropriate way to evaluate regulations is within the context of industry as one expects it to be five, ten or more years hence. This is a complex
847
Acid deposition regulation and the US coal industry task inevitably involving a large degree of uncertainty. We will take the easier, hopefully clearer - but potentially less accurate - approach of looking at the electric utility industry of 1981 and asking what it would have looked like if it had been subject to one or another acid-deposition regulation. One advantage of this is that we eliminate the uncertainty of having to guess what the industry will look like in 1995 or 2000. The disadvantage is that, inevitably, over the coming years new, 'clean' generating capacity will become operable, possibly displacing some of the 'dirty' coal capacity supposedly causing the aciddeposition problem. 12 However, the nature and extent of such shifts in the electric utility industry are highly uncertain. Our approach then is to focus on the year 1981. More specifically, we look at coal-fired electricity generating equipment operating in the year 1981 in the 31 states of the USA east of or bordering on the River Mississippi. This half of the country is typically singled out in acid-deposition legislation since essentially all high-sulphur coal is burned in this region and nearly all unscrubbed coal-fired power plants are located there. Our approach is to develop a simple model of fuel and flue-gas desulphurization (FGD) capital choice and thus, by implication, SO2 emissions for coal-fired power plants in the 31-state region. The model operates by determining the most efficient way for the 1981 utility industry to respond to particular environmental regulations. Given the prices and qualities of coal prevailing in the USA in 1981, and the estimated cost of transporting that coal, we assume that utilities will buy the cheapest coal so that environmental standards are met and the output of coal-based electricity is maintained. In meeting environmental standards, many utilities will typically face a choice between cheap, high-sulphur coal and more expensive low-sulphur coal. Of course, utilities may install flue-gas desulphurization equipment and burn high-sulphur coal if that turns out to be cheapest or is required by environmental regulations. And for the few plants with scrubbers already in place in 1981, the choice is even more straightforward: burn the cheapest coal regardless of quality since the scrubber will generally guarantee that the environmental regulation is met. The model chooses a spatial distribution of coal use and a spatial distribution of investments in scrubbing capital so that 1981 coal-fired electricity generation by state is produced at least-cost while meeting environmental regulations. The model then estimates how the utility industry responds to environmental regulation. The other
848
side of that coin is the effect of various regulations on acid deposition. If one knows the spatial distribution of emissions resulting from a particular regulation, then this question boils down to representing the relationship between emissions and acid deposition. As is well known, this relationship is subject to a great deal of uncertainty. 13 Not only is there uncertainty about where acid deposition causes the most harm but also uncertainty as to where a unit of emissions is eventually deposited. As mentioned earlier, we focus on acid deposition in the Adirondacks. We skirt the issue of the emissions-deposition relationship by using the detailed estimates of this relationship published by the U S A - C a n a d a joint governmental study of acid deposition. Although the US Government subsequently disowned the study, 14 source-receptor relationships for eight state-of-theart atmospheric transport models are reported, 15 allowing the reader to draw conclusions about both the consensus and uncertainty surrounding this relationship. The source-receptor relationship is summarized by a set of transfer coefficients, one for each source location, giving the amount of acid deposition in the Adirondacks that results from a unit of emissions of sulphur from that source location. Thus if a represents the vector of transfer coefficients then the acid deposition resulting from a vector of emission, e, is given by a'e, a scaler. We have used the mean transfer matrices from the USA-Canada study as our best estimate of the relationship between sulphur emissions and sulphur-related acid deposition. Four types of acid-rain regulation are considered here, using this model of regulation. Two are modelled after bills which have been considered in Congress whereby sulphur emission reductions are mandated and, in one of the two cases, the method of emission reduction is required to be flue-gas desulphurization. The other two types of regulations are generic-receptor-oriented and emission-oriented controls. Receptor-oriented regulation corresponds to the case where sources are controlled in the most efficient manner to satisfy an acid deposition upper limit. Emission-oriented controls are the most efficient controls to satisfy an upper limit on aggregate regional sulphur emissions. Receptor-oriented controls represent the most efficient way of achieving a deposition standard. Emission-oriented controls are somewhat less efficient but are simpler (in that source-receptor transfer coefficients need not be directly considered). In the next section of the paper we will examine the performance of these various regulations.
ENERGY POLICY November 1990
Acid deposition regulation and the US coal industry ~ Required scrubbing 5
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Figure 1. The cost of acid deposition control. Results In examining the various possible ways of regulating acid deposition, three criteria are of primary interest. One is cost. How much will the regulation cost in terms of resource outlays for pollution control? A second criterion is output of high-sulphur coal. How much will production change as a result of regulation? A third criterion is acid-deposition effects. Consider first the most efficient way of controlling acid deposition. Figure 1 presents annual costs 16 for efficient acid-deposition control, as a function of the level of acid deposition. Just over 10 units (Kg S/hectare/yr) of deposition in the Adirondacks corresponds to current deposition, at least in terms of the model. 17 No additional control is needed to achieve this level. As lower deposition rates are required, costs go up, slowly at first, but then rather rapidly as lower and lower deposition rates are sought. In other words, marginal control costs for acid deposition are relatively low over a wide range before rising as the deposition constraint becomes tighter. The implication of this is that even if the marginal damage from acid deposition is relatively modest, significant control may still be warranted, given the low marginal costs of control over a wide range. The line above the efficient frontier corresponds to emission-oriented controls. The line represents the least-cost way of achieving the various deposition rates given that sources are freely able to trade-off controls in one location with controls in another location on a one-to-one basis. Note that for relatively low control of deposition, emissionoriented regulations are fairly efficient. However, for moderate Levels of deposition, the emissionoriented controls result in substantially higher costs for the same level of deposition. For very low deposition rates, the inefficiency decreases, modest-
ENERGY P O l i C Y November 1990
ly in absolute terms but significantly in relative terms. However, for all deposition rates, the additional costs of these second-best regulations are less than $1 billion per year and often less than $500 million per year. Figure 1 can be compared to the lower two lines of Figure 2 in Streets et al. 18 Our costs would be expected to be lower (and they are) because we focus on coal combustion and utilities only, excluding all other sources of sulphur emissions, and because we consider 1981 rather than a later year. The two stylized acid-rain control bills perform in remarkably different ways. As mentioned earlier, we consider two cases. One case is where all sources must scrub SO2 to achieve 90% removal rates or better. The other case is where all sources may emit no more than 1.2 lbs of SO2 per million Btu of fuel use. Both of these limits are commonly found in legislation before Congress, although our requirement that all plants scrub at 90% is somewhat stricter because legislation generally only requires scrubbers to the extent necessary to achieve the mandated emission reduction. The 1.2 emissions limit results in sulphur dioxide emissions of 5.5 million tons (compared to the base case emissions of 17 million tons). As a variant on this case, we consider the case where sources are allowed to trade rights to emit on an interstate basis, so long as total emissions remain at 5.5 million tons. These cases are shown in Figure 1. The required scrubbing case results in low levels of acid deposition, about half the deposition associated with the 1.2 limit case. However the costs are enormous, not only between the two cases but relative to what is efficient. The same deposition levels as are achieved with forced scrubbing could be achieved at $3 billion per year less. And even if emission-oriented controls were pursued, over $2 billion could be saved annually. The 1.2 limit results in higher deposition at less cost. But more importantly, the 1.2 limit is more efficient. The 1.2 limit is very close in performance terms to emission-oriented controls, although it is nearly $1 billion per year more costly than efficient controls. Interestingly, very little gain in efficiency can be associated with allowing interstate trades. Both the with and without trade cases are similarly close to the emission-oriented control line and similarly distant from the efficient frontier. By allowing trades, costs are cut somewhat but deposition is increased in return. Turning to coal production, Figure 2 indicates the production of high sulphur coal 19 as a function of the acid-deposition rate. There are two interesting features of this Figure. One is that emission-oriented
849
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Figure 2. The effects on the high-sulphur coal industry of acid deposition control. controls have significantly greater impact on highsulphur coal production than do efficient controls. Thus, efficient controls not only cost less but have less impact on high-sulphur coal production. The principal reason for this is that while high-sulphur coal production is responsible for much of the emission problem, control of deposition requires greater attention to sources close to the Adirondacks. Highsulphur coal burned in Florida contributes little to acid deposition in the Adirondacks; however, with emission-oriented controls, sulphur emissions in Florida can be traded on a one-to-one basis with emissions in New York State. The second interesting thing to note is that under both emission-oriented and efficient controls, as deposition is reduced, high-sulphur coal production first decreases and then increases, and for very low deposition rates is actually higher than with no control. The reason for this is that for modest control levels, the optimal strategy for a firm to follow is fuel-switching - to use low-sulphur coal instead of high-sulphur coal. However, as emission regulations get tighter and tighter, it becomes cheaper to install scrubbers and use cheap high-sulphur coal. And with scrubbers installed, coal with even higher sulphur levels than the base case can be used since SIP regulations will be trivially satisfied. It should be noted that this effect would be moderated somewhat in actuality since here we assume no upper limit on scrubber efficiency. This 'reswitching' can be seen from Figure 3, where the hypothetical case of a utility in Ohio is considered. Low-sulphur and high-sulphur coal is available as is a scrubber. Scrubbing costs are from Atkinson. 2° No upper limit on removal rates is assumed in our analysis (90-95% is frequently considered a working upper limit). The Figure shows the costs (per unit of fuel used) of scrubbers and fuel to achieve the indicated emission level. Point A corresponds to the use of low-sulphur coal alone with no scrubbing; point B represents the sole use of high850
sulphur coal. Line AB represents the use of a blend. Point C represents the use of high-sulphur coal with a 90% scrubber. Line BCE represents high-sulphur coal use with various levels of scrubbing. Line A D F represents the same for low-sulphur coal. 21 Note that as the emission constraint is tightened, it first becomes desirable to blend high- and low-sulphur coal. Then partially scrubbed western coal becomes desirable. For tighter emission levels, it pays to scrub even more and use high-sulphur coal. If an upper limit on removal rates were assumed, then for the tightest control, scrubbed low-sulphur coal would be used. But barring this situation, scrubbed high-sulphur coal would be the cheapest way of meeting a stringent emission limit. Another way of looking at this is that without a scrubber, the 33-cent premium on low-sulphur coal buys 2.24 lbs less sulphur emissions, relative to high-sulphur coal. But with 90% scrubbing, the premium only buys 0.224 lb lower sulphur emissions. Returning to Figure 2, there is a certain amount of irony that the case of a 1.2 lb limit on unit SO2 emissions lies at the bottom of the acid depositionhigh sulphur coal production curve. It is as if the regulation were chosen to have maximum impact on high-sulphur coal production. Tighter or looser emission-oriented controls would have less impact. In contrast, the required scrubbing alternative
Ohio Low sulphur coal from Kentucky : 0.85 Ib S/IO 6 Btu 1.85/I0 s Btu High sulphur coal from Ohio:
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Figure 3. Control options as a function of emission rates. ENERGY POLICY November 1990
Acid deposition regulation and the US coal industry appears to be a way of causing a boom in highsulphur coal production. High-sulphur coal production is 50% higher than in the base case. If efficient controls were used, the same level of deposition could be achieved but with only modest restriction of high-sulphur coal output.
Conclusions The first point to reiterate is that by examining 1981 we have not examined the actual effects of an acid-deposition regulation put in place for the 1990s and beyond. Also, we have only examined an Adirondacks receptor; other areas are also sensitive to acid deposition. Thus, while we believe the conclusions qualitatively reflect the effects of various regulations, they should not be applied directly to shaping legislation which would apply to the utility industry in the 1990s and beyond. More sophisticated analysis should be used for that purpose. We have seen that the two most discussed proposals for controlling deposition - forced scrubbing and an emissions cap - have dramatically different effects. Forced scrubbing results in low acid deposition but at very high cost - much higher than necessary to achieve the same level of deposition. As expected, forced scrubbing does not damage highsulphur coal producers; in fact it is a tremendous boon to those producers, resulting in a 50% increase in production over the no-additional-control case. In contrast, the regulation limiting SO2 emissions to 1.2 lbs per 106 Btu of fuel, devastates the high-sulphur coal industry. In fact, it would be hard to design a regulation that is more damaging to the industry. However, the cost to society as a whole with the 1.2 limit is much more modest than the forced scrubbing regulation, although the acid-deposition protection is also more modest. Perhaps more important is that the 1.2 limit is much more efficient than forced scrubbing in terms of being closer to the efficient frontier of acid deposition v control costs, although it still is nearly $1 billion per year more costly than necessary. An actual regulation might be a hybrid, using efficient control for acid deposition combined with a compensation scheme for displaced coal miners. Another set of conclusions concerns the relative performance of emission-oriented v efficient (or receptor-oriented) regulations. Emission-oriented regulations are considerably more costly than efficient regulations, particularly in the middle-range of acid-deposition levels, costing $500-750 million per year more than efficient regulations. In addition, emission-oriented regulations have much more se-
ENERGY POLICY November 1990
rious impacts on high-sulphur coal producers than do efficient regulations. In summary, efficient, receptor-oriented regulations are markedly superior to either emissionoriented regulations, forced scrubbing or the 1.2 limit on both cost grounds and impacts on highsulphur coal producers. Furthermore, regulations to achieve relatively low or high levels of deposition are superior in terms of dislocation to the high-sulphur coal industry. It might be that the most politically tractable way of controlling acid rain is with strict, but cost-effective, regulations. A full technical explanation of the acid-deposition regulation model presented in the text is available from the author. Able computational assistance was provided by Gang Yi and is gratefully acknowledged. I thank Dan Golumb for interesting and useful conversations and Roger Morris, Dwaine Wentors and Curtis Moore for providing invaluable historical information on the acid deposition regulatory debate. Comments on an earlier draft of this paper from Dan Golumb, Don Hanson and Paul Portney are much appreciated. Earlier versions of this paper were presented at the November 1984 meeting of the International Association of Energy Economists in San Francisco and the December 1984 meeting of the American Economic Association in Dallas. 1 See B.A. Ackerman and W.T. Hassler, Clean Coal Dirty Air, Yale University Press, New Haven, CT, USA, 1981, for a fascinating account of the politics behind the revised new source performance standard. : T.H. Tietenberg, 'Transferable discharge permits and the control of stationary source air pollution: a survey and synthesis', Land Economics, Vol 56, No 4, 1980, pp 391-416; T.H. Tietenberg, 'Spatially differentiated air pollutant emission charges: an economic and legal analysis', Land Economics, Vol 54, 1978, pp 265-277; S.E. Atkinson and T.H. Tietenberg, 'Bilateral sequential trading and the cost-effectiveness of the bubble policy', 1990, unpublished. 3 H. Dowlatabadi and W. Harrington, 'Policies for the mitigation of acid rain', Energy Policy, Vol 17, 1989, pp 116-122. 4 Congressional Budget Office, Curbing Acid Rain: Cost, Budget and Coal-Market Effects, Washington, DC, USA, June 1986; op cit, Ref 3; D. Golumb, J.A. Fay, and S. Kumar, 'Seasonal, episodic and targeted control of sulfate deposition', APCA Journal, Vol 36, 1986, pp 798-802; J. Fay, D. Golumb and J. Gruhl, Controlling Acid Rain, Energy Lab Report MIT-EL-83-004, Massachusetts Institute of Technology, Cambridge, MA, USA, 1983; D.G. Streets, D.A. Hanson and L.D. Carter, 'Targeted strategies for control of acid deposition', Journal of the Air Pollution Control Association, Vol 34, No 12, 1984, pp 1187-1197; Office of Technology Assessment, Acid Rain and Transported Air Pollutants: Implications for Public Policy, Report OTA-O-204, US Congress, Washington, DC, USA, June 1984; ICF Inc, Analysis of Senate Emission Reduction Bill (S-3041), prepared for Office of Policy Analysis, Office of Policy and Resource Management, Environmental Protection Agency, Washington, DC,
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Acid deposition regulation and the US coal industry USA, February 1983; ICF Inc, Analysis of Cost-Effective, Phased-in Reduction of Sulphur Dioxide Emissions, prepared for Alliance for Clean Energy, Washington, DC, USA, February 1984; ICF Inc, Analysis of EDF's Acid Rain Control Proposal, memorandum to EPA, Washington, DC, USA, 19 May 1989; B. O'Brien, A. Fuldner, M. Paull, T. Petersik and S. Kanhouwa, Impacts of the Proposed Clean Air Act Amendments of 1982 on the Coal and Electric Utility Industries, Report DOE/EIA-0407, US Department of Energy, Washington, DC, USA, June 1983. 5 ICF Inc, 1989, op cit, Ref 4. 6 Congressional Budget Office, 1986, op cit, Ref 4. 7 Streets et al, 1984, op cit, Ref 4. 8 ICF Inc, 1983, op cit, Ref 4. 9 Office of Technology Assessment, 1984, op cit, Ref 4. x0 Streets et al, 1984, op cit, Ref 4. 11 Office of Technology Assessment, 1984, op cit, Ref 4. lZ The existence of new capacity per se is less important than how the operation of the 'dirty' capacity is affected by new cheaper capacity, new electricity demand and retirements of older capacity. 13 See National Research Council, Acid Deposition: Atmospheric Processes in Eastern North America, National Academy Press, Washington DC, USA, 1983. 14 Needless to say, there was a great deal of politics involved in the joint study. A major reason put forward by
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the Reagan administration for postponing acid-deposition control legislation was that not enough was known about acid deposition. It thus became difficult for the US ~5overnment to support a study suggesting otherwise. F.A. Schiermeir and P.K. Misra, Final Report, Technical Basis, Report No 2 F-M of Regional Modeling Subgroup of Work Group 2, established under USA-Canada Memorandum of Intent on Transboundary Air Pollution, Ottawa, Canada, November 1982. 16 These are incremental costs, over and above the costs associated with no acid deposition control, although including existing (1981) air regulations. 17 This compares to measured 1981 wet deposition of 11.7 Kg S/hectare (see Streets et al, 1984, op cit, Ref 4) which is quite a good match since electric utilities are not the only source of SO2. 18 Streets et al, 1984, op cit, Ref 4. 19 Defined here as the total amount of coal produced for electricity generation in Illinois, Indiana, Ohio, West Kentucky, Northern West Virginia and Western Pennsylvania (Bureau of Mines Coal-Producing Districts 2, 3, 4, 6, 9, 10, 11). e0 S.E. Atkinson, 'Marketable pollution permits acid rain externalities', Canadian Journal of Economics, Vol 16, No 4, 1983, pp 704-722. 21 Partial scrubbing of blended coal is not shown in the figure.
ENERGY POLICY November 1990