ESTIMATION OF PRODUCTION TECHNOLOGIES WITH OUTPUT AND ENVIRONMENTAL CONSTRAINTS

Abstract

Coal-fired power plants minimize costs subject to output and emission constraints. We model the plants' choice of coal quality and emission abatement to minimize costs under these constraints, allowing for heterogeneous unobserved generation productivity and abatement efficiency. We derive and estimate the plants' cost functions to recover the production technologies. Our data set is a balanced panel of 76 U.S. coal-fired power plants from 1995 to 2005, when the emission permit trading system was viable. We find a dramatic growth in abatement efficiency, a major goal of the Acid Rain Program. By contrast, the growth in generation productivity is positive but small.