The impacts of the Clean Air Act on production cost, and the substitution between inputs in the electric utility industry

Abstract

The paper examines how having to comply with Phase 1 of Title IV of the 1990 Clean Air Act affected production cost and the substitution between fuel and non-fuel (labor, capital) inputs. Phase 1 required firms to reduce their sulfur dioxide emissions. Enacting procedures to reduce sulfur dioxide emissions (using lower sulfur content coal or other fuel sources) could lead to higher cost, and impact the substitution between fuel and non-fuel inputs. Using a 1992-2000 panel of 34 U.S. electric utilities, empirical results indicate that the procedures electric utilities enacted to comply with Phase 1 contributed to small increases in both marginal cost and total cost. Firms having to comply with Phase 1 were more willing, than firms not subject to Phase 1, to substitute from fuel to non-fuel (labor, capital) inputs following an increase in the price of fuel. Utilities subject to Phase 1 that had a fuel clause were more willing, than Phase 1 firms without a fuel clause, to substitute from non-fuel inputs to fuel when the price of the non-fuel input increased.