Potential gains from trading bad outputs: The case of U.S. electric power plants

Jointly with kilowatt-hours (kWh), electric power plants also produce CO2, NOx, and SO2. In this paper, we apply an environmental production model based on data envelopment analysis (DEA) to compare the production of kWh under command-and-control regulation of the undesirable byproduct with tradable permit regulation of the byproduct. This is done for each of the three undesirable outputs and combinations of them. We apply our model to a dataset of 80 coal-fired electric power plants from 1995 to 2005. From this we can identify the potential gains from trading the most common undesirable outputs produced by coal-fired electric power plants.