The environment as a factor of production |
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| Institution: | 1. The Pennsylvania State University, 125 Hosler, University Park, PA 16802, USA;1. Graduate School of Engineering, Hiroshima University, Higashi-Hiroshima 739-8527, Japan;2. Environmental Research Management Center, Hiroshima University, Higashi-Hiroshima 739-8513, Japan;3. Faculty of Liberal Arts, The Open University of Japan, Chiba 261-8586, Japan;1. Biological Sciences and Bioengineering Program, Faculty of Engineering and Natural Sciences, Sabanci University, Orhanli-Tuzla, 34956 Istanbul, Turkey;2. Department of Clinical and Biological Sciences, University of Torino, Torino, Italy;1. Departamento de Farmacología, Facultad de Veterinaria, Universidad de Santiago de Compostela, Lugo 27002, Spain;2. Geoazur, UMR Université Nice Sophia Antipolis-CNRS-IRD-OCA, 250 rue Albert Einstein, 06560, Valbonne, France;3. Marine Biodiscovery, School of Chemistry, National University of Ireland Galway, University Road, Galway, Ireland |
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| Abstract: | This paper uses firm-level data about electric utilities to develop an empirical model of how electric utilities use and bank SO2 pollution permits under the Acid Rain Program. The empirical model considers emissions, fuels, and labor as variable inputs with quasi-fixed stocks of permits and capital. Consequently, substitution possibilities between the environment and other production factors can be measured and tested. The results reveal substantial substitution between emissions, permit stocks, capital, fuel, and labor. The empirical findings also indicate that firms bank permits primarily as a hedge against uncertainty and for other firm-specific reasons. Overall, the results suggest that cap-and-trade approaches can reduce the cost of meeting environmental goals by providing a mechanism for addressing regulatory and market risks and by signaling an appropriate price for factor use, especially irreversible capital investments. |
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