Abstract
The welfare cost of reducing sulfur dioxide emissions from electric power plants is computed for four policies: an emissions tax, fuel quality standards, required abatement capital use, and an abatement subsidy. The model, developed using the Harberger tax incidence methodology, includes a demand function, a production function with capital, clean fuel and dirty fuel inputs, and an emissions function with dirty fuel and abatement arguments. For the tax policy, factor demands derived from a profit function close the model, while for regulatory cases, constraints are used. The relative changes in the endogenous variables are determined as a function of the percentage emissions reduction, from which an income equivalent of the welfare change is measured using estimates of system elasticities. The welfare cost differences between the efficient and regulatory policies are high, so that greater reliance on decen tralized programs is recommended.
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