A Network Analysis Approach to Analyze Factors that

Motivate Power Plants Trading Behavior

Zhao and Kolpakov

Scholars who evaluate the US SO₂ cap and trade program, i.e., the acid rain program (ARP), tend to take two different approaches: the program evaluation approach and the environmental justice approach. Those who take a traditional program evaluation approach focus on the reduction of emissions of SO₂ and NOx and reduced adverse public health effects as well as cost and benefit analysis of implementing this program (e.g.: Shadbegain, Gray and Mrogan, 2007; Chestnut and Mills, 2005; Ellerman, 2003; Schennach, 1998; Ellerman and Montero 2005).  Environmental justice scholars, however, tend to analyze whether this nation-wide trading program have concentrated adverse environmental consequences to low-income and minority groups who tend to have less political power and are less mobile (e.g. Ringquist, 2005, 2008, 2012; Corburn 2002; Fowlie, Howland and Mansur, 2009; U.S. EPA 1998). However, even though scholars observe that this trading market has evolved increasingly more liquid, there has been little research showing the factors that have facilitated the evolution of the market. Specifically, we ask questions about how the market evolves: 1) whom power plants tend to trade with; 2) how they select partners to trade emission allowances; and 3) what policies and mechanisms have helped to disseminate information among power plants; therefore, facilitating their trading behavior.

In this paper, we adopt a network analysis approach to uncover some of the behavioral motivations of power plants that have participated in this trading program. In particular, we first identify the patterns of trading behavior such as who is more likely to trade with whom and whether power plants tend to trade with power plants that are located in the same judicial region or outside the region. We then incorporate state level and power plant level variables to predict what has resulted in particular trading patterns. Our analysis investigates whether increased market liquidity is a natural evolution of information dissemination through power plants interactions or whether there are a set of state level policies that have facilitated power plants’ utilization of the trading market.

Identifying factors that motivate and facilitate power plants’ trading behavior has strong policy implications. Our research can help scholars and policy makers to understand how allowance-trading market evolved from the perspective of business. As cap-and-trade programs are increasingly more popular in regulating other types of pollution such as water and hazardous waste pollution, the experience from ARP could be helpful to facilitate setting up effective trading markets in other areas.