Accessible Unlicensed Requires Authentication Published by De Gruyter July 13, 2016

Can Polluting Firms Favor Regulation?

Félix Muñoz-García and Sherzod B. Akhundjanov

Abstract

This paper investigates the production decisions of firms with asymmetric environmental damages, and how their profits are affected by environmental regulation. We demonstrate that emission fees entail a negative effect on firms’ profits, since they increase unit production costs. However, fees can also produce a positive effect for a relatively inefficient firm, given that environmental regulation mitigates its cost disadvantage. If such a disadvantage is sufficiently large, we show that the positive effect dominates, thus leading this firm to actually favor the introduction of environmental policy, while the relatively efficient firm opposes regulation. Furthermore, we show that such support can originate from polluting companies.

JEL Classification: L13; D62; H23; Q20

Appendix – Emissions and Costs in Different Industries

Table 1:

Air emission factor ranges for freight truck and rail, in grams/tone-km.

PollutantTruckTrain
CO0.25–2.400.02–0.15
CO2127–45141–102
HC0.30–1.570.01–0.07
NOx1.85–5.650.20–1.01
SO20.10–0.430.07–0.18
Particulates0.04–0.900.01–0.08
VOC1.100.08

Source: OECD (1997).

Note: CO, carbon monoxide; CO2, carbon dioxide; HC, hydrocarbons (e. g., methane, pentane, etc.); NOx, nitrogen oxides; SO2, sulfur dioxide; VOC, volatile organic carbon compounds.

Table 2:

Estimated annualized cost of power with carbon controls (2008 US$).

TechnologyNon-fuel costFuel costSO2 and NOx costCO2 costProduction tax creditCapital returnTotal cost per Mwh
Coal: Pulverized$5.57$11.13$0.61$0.00$0.00$45.79$63.10
Coal: IGCC$5.46$10.41$0.10$0.00$0.00$67.02$82.99
Nuclear$6.13$5.29$0.00$0.00($3.18)$74.99$83.22
Table 3:

Estimated annualized cost of power with carbon controls (2008 U.S. $).

TechnologyNon-fuel costFuel costSO2 and NOx costCO2 costProduction tax creditCapital returnTotal cost per Mwh
Coal: Pulverized$5.57$11.13$0.61$33.80$0.00$49.58$100.69
Coal: Pulverized/CCS$13.48$14.13$0.77$4.29$0.00$78.87$111.54
Coal: IGCC$5.46$10.41$0.10$31.61$0.00$67.02$114.60
Coal: IGCC/CCS$7.10$12.61$0.13$3.83$0.00$95.25$118.92
Nuclear$6.13$5.29$0.00$0.00($3.18)$74.99$83.22

Source: U.S., Congressional Research Service (2008).

Note: Mwh, megawatt-hour; IGCC, integrated gasification combined cycles; CCS, carbon capture and sequestration (which assuming current technology, is capable of removing 90 % of CO2); SO2, sulfur dioxide allowance costs; NOx, nitrogen oxides allowance costs; CO2, carbon dioxide allowance costs.

Acknowledgment

We thank the editor, Till Requate, and two reviewers for their useful insights and recommendations. We are also grateful to Ana Espinola-Arredondo and Hayley Chouinard, as well as participants of the 88th annual meeting of the Western Economic Association International for their helpful comments and suggestions.

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Published Online: 2016-7-13
Published in Print: 2016-10-1

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