Forecasting the market for SO sub 2 emission allowances under uncertainty

This paper deals with the effects of uncertainty and risk aversion on market outcomes for SO{sub 2} emission allowance prices and on electric utility compliance choices. The 1990 Clean Air Act Amendments (CAAA), which are briefly reviewed here, provide for about twice as many SO{sub 2} allowances to be issued per year in Phase 1 (1995--1999) than in Phase 2. Considering the scrubber incentives in Phase 1, there is likely to be substantial emission banking for use in Phase 2. Allowance prices are expected to increase over time at a rate less than the return on alternative investments, so utilities which are risk neutral, or potential speculators in the allowance market, are not expected to bank allowances. The allowances will be banked by utilities that are risk averse. The Argonne Utility Simulation Model (ARGUS2) is being revised to incorporate the provisions of the CAAA acid rain title and to simulate SO{sub 2} allowance prices, compliance choices, capacity expansion, system dispatch, fuel use, and emissions using a unit level data base and alternative scenario assumptions. 1 fig.