Acid Rain: The Southern Company (A)
Acid Rain: The Southern Company (A)
Case Study #1
2/01/2012
Situation: The acid rain provisions of the 1990 amendments to the Clean Air Act were to being in 1995. Currently, it is 1992 and The Southern Company (a electric utilities holding company operating in Georgia, Alabama, Mississippi, and Florida) had to decide what actions they were going to take in order to comply with the new regulations. Before the Clean Air Act, firms did not have incentives to reduce emissions below the government specification. If a firm exceeded the amount, it would just simply pay a fine. Maximum limits were put into place and allowances could be bought and sold on the open market. This means that companies that were able to reduce their emissions, could make money off the allowances they sold. That provided …show more content…
The two main risk factors the company faces are government policies and the purchasing/selling of the allowances on the open market. a. The change in government policy. As the government becomes more and more concerned about pollution, there are possibilities that more policies or stimulus such as ecological taxation would be carried out. Although the current effective tax rate is 37.7%, the company will save a portion of tax expense by installing scrubbers to control once a tax refund policy is implemented to low level pollutants emission companies. b. The change in allowance price. The company planners assume the price of allowances would be $250 per ton of sulfur dioxide in 1995 and would rise at 10% per year through 2010 and stay at that price since after. However, since the allowances could be traded in open market, their value is volatile. If the starting price of allowance rises to a certain level or the price increases at a higher rate, the PV cost of option 1 will be higher. (graph 2 and 3).
Graph 2: PV cost of option V.S. starting price of
Case Study #1
2/01/2012
Situation: The acid rain provisions of the 1990 amendments to the Clean Air Act were to being in 1995. Currently, it is 1992 and The Southern Company (a electric utilities holding company operating in Georgia, Alabama, Mississippi, and Florida) had to decide what actions they were going to take in order to comply with the new regulations. Before the Clean Air Act, firms did not have incentives to reduce emissions below the government specification. If a firm exceeded the amount, it would just simply pay a fine. Maximum limits were put into place and allowances could be bought and sold on the open market. This means that companies that were able to reduce their emissions, could make money off the allowances they sold. That provided …show more content…
The two main risk factors the company faces are government policies and the purchasing/selling of the allowances on the open market. a. The change in government policy. As the government becomes more and more concerned about pollution, there are possibilities that more policies or stimulus such as ecological taxation would be carried out. Although the current effective tax rate is 37.7%, the company will save a portion of tax expense by installing scrubbers to control once a tax refund policy is implemented to low level pollutants emission companies. b. The change in allowance price. The company planners assume the price of allowances would be $250 per ton of sulfur dioxide in 1995 and would rise at 10% per year through 2010 and stay at that price since after. However, since the allowances could be traded in open market, their value is volatile. If the starting price of allowance rises to a certain level or the price increases at a higher rate, the PV cost of option 1 will be higher. (graph 2 and 3).
Graph 2: PV cost of option V.S. starting price of