CAC and Incentives for Truth Telling Before passing regulations on Coke ovens in the steel industry, the EPA estimated that the costs of controlling hazardous air pollutant emissions would be about $4 billion; four years later, that estimate had fallen to between $250 and $400 million. Similarly, projections for benzene emission control were on the order of $350,000 per plant; in actuality, chemical companies found they were able to use substitutes, which “virtually eliminated control costs.”2 We showed in this appendix that industry has an incentive to overstate costs if faced with marketable permit regulation. Does the same incentive hold for CAC regulation, which was used in Applications 15.0 and 15A.0? 1. Assume (1) that the EPA’s initial cost estimates provided earlier were based on industry sources and (2) that the EPA sought to regulate these pollutants at the efficient level.3 Use a diagram to provide a possible explanation for why the cost estimates were so high. (Show that under CAC regulation, where a uniform emission standard is set, industry has an incentive to overstate true costs.)
CAC and Incentives for Truth Telling
Before passing regulations on Coke ovens in the steel industry, the EPA estimated that the costs of controlling hazardous air pollutant emissions would be about $4 billion; four years later, that estimate had fallen to between $250 and $400 million. Similarly, projections for benzene emission control were on the order of $350,000 per plant; in actuality, chemical companies found they were able to use substitutes, which “virtually eliminated control costs.”2 We showed in this appendix that industry has an incentive to overstate costs if faced with marketable permit regulation. Does the same incentive hold for CAC regulation, which was used in Applications 15.0 and 15A.0?
1. Assume (1) that the EPA’s initial cost estimates provided earlier were based on industry sources and (2) that the EPA sought to regulate these pollutants at the efficient level.3 Use a diagram to provide a possible explanation for why the cost estimates were so high. (Show that under CAC regulation, where a uniform emission standard is set, industry has an incentive to overstate true costs.)
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