1. Driving Forces Behind the Adoption of Pollution Control Technologies in the Electricity Sector : A U.S. Perspective Meredith Fowlie University of Michigan Meredith Fowlie University of Michigan Research Foresight for Environment and Sustainability Copenhagen, May 2007

2. Driving forces for technology adoption I will emphasize the role of regulation as a driving force. Traditionally, the role of environmental regulation in driving adoption of pollution control/clean energy technologies is emphasized. Economic regulation of industry is also important. Economic regulation and deregulation can have significant and unanticipated effects on pollution control technology adoption decisions. In the interest of “predicting surprises”, it is important to pay attention to both the environmental and economic regulatory incentives that drive adoption decisions.

3. Case I : U.S. Acid Rain Program Title IV of the CAAA 1990 capped SO2 emissions from electricity generators – emissions reduced to 50% of 1980 levels. Phase I of the program began in 1995. Regulators anticipated that the vast majority of reductions would be achieved by installing FGD technology. Estimated compliance costs (1995 $US): –$7.9 billion per year (US Office of Technology Assessment) –$11.5 billion per year (industry study).

4. Some unanticipated outcomes.. Phase I emissions were 35% below the legal limit! Compliance costs approx. $0.8 billion per year (versus $7.9 or $11.5!) Over 50% of Phase I emissions reductions achieved by fuel switching!

5. An important driving force: Railroad deregulation Powder River Basin (PRB) coal is very low cost and has very low sulfur content. Prior to 1990, the cost of transporting PRB coal from Wyoming to major markets was prohibitively high (delivered coal price five times the mine mouth price). Deregulation of the railroads dramatically reduced rail rates. The flexibility of the Acid Rain Program allowed plants to exploit unexpected fuel switching opportunities – adoption of FGD technology much less than anticipated.

6. Case II : The NOx Budget Program A cap-and-trade program regulating NOx emissions from major sources in 19 Eastern states. Over 80% of regulated emissions come from coal fired electricity generators. Compliance required by 2004. Different control technologies vary considerably in terms of NOx removal efficiency, capital costs, and variable operating costs. Selective Catalytic Reduction (SCR) technology can reduce NOx emissions by 90%.

7. Some unanticipated outcomes.. Environmental regulators anticipated that investment in pollution control equipment would be distributed roughly equally between northern and southern electricity markets. The majority of the investment in pollution control equipment occurred in southern electricity markets. There has been more investment in SCR technology than anticipated

8. An important driving force: Electricity industry restructuring Electricity markets in the Northeast and Midwest restructured in the 1990s. Southern electricity markets remain regulated. Firms in regulated electricity markets are guaranteed to earn a positive rate of return on prudent capital investments. Controlling for variation in plant characteristics and compliance costs, plants in regulated markets more likely to adopt capital intensive pollution control technology.

9. Summary Lots of driving forces to consider when trying to predict patterns of pollution control technology adoption in energy industries. Economic regulation and deregulation has played a significant role in determining technology adoption under market based environmental regulation in the United States. Variation in economic regulatory incentives across EU member states could similarly play a role in determining technology adoption decisions of energy producers.