Alternative methods of marginal abatement cost estimation: Non- parametric distance functions

This project implements a economic methodology to measure the marginal abatement costs of pollution by measuring the lost revenue implied by an incremental reduction in pollution. It utilizes observed performance, or `best practice`, of facilities to infer the marginal abatement cost. The initial stage of the project is to use data from an earlier published study on productivity trends and pollution in electric utilities to test this approach and to provide insights on its implementation to issues of cost-benefit analysis studies needed by the Department of Energy. The basis for this marginal abatement cost estimation is a relationship between the outputs and the inputs of a firm or plant. Given a fixed set of input resources, including quasi-fixed inputs like plant and equipment and variable inputs like labor and fuel, a firm is able to produce a mix of outputs. This paper uses this theoretical view of the joint production process to implement a methodology and obtain empirical estimates of marginal abatement costs. These estimates are compared to engineering estimates.