Center for the Study of Energy Markets

This paper analyzes the effects of the New Source Review (NSR) environmental regulations on coal-fired electric power plants. The New Source Review program, which grew out of the Clean Air Act of 1970, required new plants to install costly pollution control equipment but exempted existing plants with a grandfathering clause. Previous theoretical research has shown that vintage differentiated regulations, like NSR, can lead to distortions, and if the distortions are large, the short-run effect of a regulation like NSR may be to increase pollution rather than reduce it. Older, dirtier plants may be kept in service longer or run more intensively since replacing them becomes more expensive. In the case of NSR, there is also an effect associated with its enforcement. Since upgrading a plant could potentially qualify it as a new plant, the old plants may have done less maintenance leading to lower efficiency and higher emissions. This paper attempts to estimate the extent to which these mechanisms have impacted coal-fired electric power plants. We find suggestive evidence that NSR increased operating lifetimes of plants in areas where environmental regulations were most stringent. We also find evidence that the risk of NSR enforcement reduced capital expenditures at plants. However, we find no discernable effect on the operating costs or fuel efficiency of these plants.