ABSTRACT
Electricity generation is a major source of U.S. air pollution. In the midst of searching for new ways to reduce emissions, environmental regulators and other policymakers are eager to understand how increased competition in electricity markets is likely to affect the size of that sector’s contribution to different air pollution problems. The effect of restructuring on the amount of air pollution will depend on three key factors: how competition affects the size of the market for electricity, how competition changes the mix of technologies used to generate electricity, and the form of environmental regulations governing electricity generators. In general, competition could lead to greater emissions of those pollutants that are not subject to strict caps, such as carbon dioxide, unless additional provisions are made to make it more attractive to use renewables and other technologies that emit few pollutants.
Opening electricity markets to competition is also likely to affect the performance of environmental regulation. Competition will likely limit voluntary actions to reduce emissions. At the same time, it will enhance incentives for electricity generators to take advantage of emissions trading. Environmental regulation and plantsiting requirements could reduce incentives for investment in new generation by potential competitors, which could adversely affect market performance. However, the magnitude of these effects is largely unknown and may be dwarfed by the investment-reducing effects of general uncertainty about the future of electricity restructuring.
