Emissions Abating Technology Adoption under the SO2 Permit Market: A Social Networks Approach

SO
₂
, sulfur dioxide, emissions generated by electric power plants account for a large proportion of the total emissions in the U.S.A.. In 2008, electricity generation caused nearly 7.9 million tons of SO
₂
emissions out of a total of 9.5 million tons. The negative side effects of SO
₂
emissions have been thoroughly evaluated, especially health deterioration issues caused by acid rain and other unwanted impacts that generate significant social costs. In response to these effects, the U.S. Congress passed the Clear Air Act (CAA) in the 1970s to cut down SO
₂
among other emissions. The CAA Amendments (CAAA) of 1990 created a competitive cap-and-trade market for SO
₂
allowances that lowered overall emission levels. This paper builds a social network among the different states of U.S.A. based on the trade of coal during the period 1990 to 2005 to evaluate the factors that affect the decision of coal burning electric power firms to adopt emission abating technology. In particular, these companies follow one or a combination of these strategies to comply with the CAAA emission restrictions: 1) paying the new costs of emissions and continuing business as usual, 2) using higher quality inputs (lower sulfur coal) that generate less pollution, or 3) upgrading their processes and equipment to lower emissions. The main factors explored are prices and quantities of low and high sulfur coal, SO
₂
allowances prices, and the operation and maintenance cost of abating technology (flue-gas desulfurization (FGDs) or scrubbers). This paper concludes that firms respond to the imposition of pollution control regulations by selecting a strategy that simultaneously control emissions and minimize costs. The firms reduce their pollutions using higher quality inputs (sub-bituminous coal), investing in new emission abating technology or a combination of both approaches. The longitudinal social network analysis shows that the dynamic of the fuel network where there is an increasing adoption of technology by most of the states may explain, jointly with the reduction of gas prices, the collapse of the allowance market for SO
₂
after 2005.