Sulfur Dioxide Allowance Trading and Technological Progress

This study estimates allowance price induced technological progress using directional output distance function for a panel data of 80 plants of US fossil fuelled electricity generating industry over the period 1995 to 2001. This application yields several important insights. First, we observe the presence of larger allowance price induced technical change effects in the plants that participated in allowance trading in comparison to the other plants. This supports the argument that emission permits spur higher technological advancements in comparison to performance based technological standards. Second, the magnitude of output bias arising from exogenous forces is greater than the output bias arising from allowance prices. Third and finally, the estimates of elasticity of substitution show that over the period of time further reduction in SO2 emissions is becoming costlier