WHAT DO SO2 EMISSIONS COST - ALLOWANCE PRICES AND EXTERNALITY ADDERS

Several states require electric utilities to include estimates of external environmental costs (''adders'') in economic comparisons of conservation and supply alternatives by electric utilities. What are these costs when emissions are subject to a tradeable allowance system, as SO2 emissions by U.S. utilities are? In the simplest case, the social cost of additional emissions at a location then equals: (1) The allowance price plus (2) the external cost of those emissions minus the external costs avoided because emissions at other locations decrease. Emissions elsewhere must decrease because the total number of allowances is fixed. Since allowances are an internal cost, the appropriate adder is just the second quantity. Its value can be positive or negative. If negative, this implies that the local state regulatory commission should encourage emissions in its jurisdiction because they cause less damages then if emitted elsewhere. The general result is unaffected by the presence of local emission restrictions. However, if other jurisdictions also impose adders, the social cost expression becomes more complex.