Policy Uncertainty in the Market for Coal Electricity : The Case of Air Toxics Standards

Legislation often empowers agencies to develop rules, but legal challenges may create uncertainty, thereby increasing firm costs, delaying policy objectives, and affecting externalities. This paper investigates policy uncertainty surrounding the Mercury and Air Toxics Standard, estimating a dynamic oligopoly model of technology adoption and exit for coal electricity generators that extends moment-based Markov equilibrium. To recover annual profits, we develop estimators for ramping and operation and maintenance costs. Our estimated perceived enforcement probability fell as low as 43% in 2014. Removing policy uncertainty would increase expected discounted generator profits by $0.930 billion, but increase pollution by $0.809 to $2.206 billion