WHAT DO SO2 EMISSIONS COST - ALLOWANCE PRICES AND EXTERNALITY ADDERS

Several states require electric utilities to include estimates of exte rnal environmental costs (''adders'') in economic comparisons of conse rvation and supply alternatives by electric utilities. What are these costs when emissions are subject to a tradeable allowance system, as S O2 emissions by U.S. utilities are? In the simplest case, the social c ost of additional emissions at a location then equals: (1) The allowan ce price plus (2) the external cost of those emissions minus the exter nal costs avoided because emissions at other locations decrease. Emiss ions elsewhere must decrease because the total number of allowances is fixed. Since allowances are an internal cost, the appropriate adder i s just the second quantity. Its value can be positive or negative. If negative, this implies that the local state regulatory commission shou ld encourage emissions in its jurisdiction because they cause less dam ages then if emitted elsewhere. The general result is unaffected by th e presence of local emission restrictions. However, if other jurisdict ions also impose adders, the social cost expression becomes more compl ex.