Why sulfur dioxide emissions decline significantly from coal-fired power plants in China? Evidence from the desulfurated electricity pricing premium program

Abstract Sulfur dioxide (SO2) emissions from coal-fired power plants in China have declined significantly since an incentive-based policy named as the desulfurated electricity pricing premium program (DEPPP) was implemented for all coal-fired power plants in 2006. Using industrial pollution panel data from 350 prefectures in China and difference-in-differences models, we estimate causal effects of the DEPPP on the coal-fired power plants. We find that the DEPPP provided the coal-fired power plants strong incentives to invest in capital-intensive flue gas desulfurization (FGD) equipment and to operate the installed FGD at a higher rate, and thus contributed to significant reductions in total SO2 emissions in China. Our results suggest that the DEPPP reduced uncertainty faced by the coal-fired power plants when making large capital investments in SO2 abatement techniques such as FGD to comply with stringent environmental regulations. However, the DEPPP may not be cost-effective in reducing SO2 emissions given heterogeneous marginal costs for operating FGD units in different coal-fired power plants. Furthermore, the effectiveness of the DEPPP also depends on strengthened environmental regulatory capacities to enforce coal-fired power plants to comply with the operating rate requirement for the installed FGD.