What Can We Learn from the

Grand Policy Experiment?

Lessons from SO2
Allowance Trading

Robert N.Stavins
and www.epa.org
Introduction
 Aim of my presentation:
 To give a summary of Stavins’ paper
 To provide you with the latest available data on
SO2 ATS based on Acid Rain Program 2005
Progress Report
 Aim of Stavins’ paper
 To identify lessons from SO2 ATS
 Aim of Progress Report
 Toprovide updated information on SO2 and
NOх reduction program 2
Outline
 Positive Political Economy Lessons
 Why command-and control
 Why freely allocated tradable permits
 Why a market-based approach
 SO2 Allowance Trading System and Its
Performance: Info from www.epa.org
 Normative Lessons
 Design and implementation
 Analysis
 Identifying new applications
 Conclusion 3
 Economists’ view of the instruments
real world Not UMP
uncertainty UMP

cost dynamic reliability 2nd-best info

efficiency efficiency arguments requirem.

CAC: no weak / no no
Quotas - - ++ 0 0
Technolog. - -- - - ++
standards (+for LDC)
MBI: yes yes yes

Emissions ++ ++ - - ++
taxes
Tradable ++ + ++ 0/+ 0 yes
permits

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Command-and-control instruments
were favored by:
lobby (advantages for existing firms)
Affected firms
“licence to pollute”, difficult to
Environmental monetize, market instruments will be
advocacy groups difficult to tighten, “hot spots”
eastern mines versus western
Organized labor

trained in law, hide the costs of

Legislators pollution control, symbolic politics,
risk averse
familiar with CAC, different kind of
Bureaucrats expertise, want to preserve their
human capital
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Types of market-based instruments
 Freely allocated tradable permits
 dominate
 Auctioned permits
 2 percent of total allocation
 Environmental taxes/subsidies
 Taxes as revenue-raising instrument

 MBI in 1990? MBI became politically

attractive under Bush and then Clinton
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Among MBI, freely allocated
permits were favored by:
Affected firms advantages for existing
firms/entry barriers
Environmental don’t want visibility of
advocacy groups protection costs
Legislators easier to supply, greater
political control over
the distributional
effects
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General setup www.epa.org

 SO2 trading as part of the Acid Rain Program

 Initial aim
 to reduce acidification of forest and aquatic
ecosystems
 Why electric generating units ?
 In USA, the electric power industry accounts for
approximately 67 percent of total annual SO2
emissions

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Implementation
 Title IV of the Clean Air Act amendments
 1990
 Aim: to cut nationwide SO2 emissions by 50 percent below 1980
levels by the year 2000 / 2010
 Phase I
 1995
 Phase II
 2000
 Compared to 1980 levels, SO2 emissions from power plants
have dropped by more than 7 mln tons, or about 41 percent
 Full implementation
 2010
 Compliance
 2002: 1 unit penalized
 2005: full compliance!
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Allowance trading: general rules
www.epa.org
 Allowance holders can transfer their permits
among one another => cost-effectiveness
 Allowances can be banked for future use
 MAC to be equated across sources = aggregate
abatement at minimum TC
 Auction
 Penalty of 2000 USD per ton of emissions
(adjusted for inflation) exceeding any year’s
allowance + requirement to offset the excesses
the following year

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 SO2 Allowance Prices

A rise: prices reacted to the likelihood of future

emission reduction requirements (CAIR) 11
SO2 Emissions from Acid Rain
Program Sources

12
SO2 Emissions and the
Allowance Bank, 1995-2005

13
State-by-State SO2 Emission
Levels, 1990–2005

14
SO2

15
Acid rain

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Design and implementation lessons
 Flexibility
 Simplicity
 Absolute baseline (cap-and-trade)
 Monitoring and enforcement
 Continuous for confindence, but costly
 Stiff penalties
 Auctioned more efficient

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Lessons for analysis
 Aggregate cost savings
 Pre-existing factor taxes: may influence the
TC of new regulation
 Local regulation and commissions
(hinge/encourage)
 Minimize risk rather than costs
 LR contractual precommitments
 Future regulatory uncertainty: prevents
from investment 18
Lessons for new applications
 Big abatement cost heterogeneity
 Degree to which pollutants mix in the
receiving air/watershed: the greater the
degree, the more attractive MB
 Low transaction costs (politically feasible)
 Emissions leakage
 Leaded gasoline example
 A suggestion for CO2: input trading linked
to the carbon content of fossil fuels 19
Conclusions
 More impirical work is needed on the
influence of pre-existing regulation on the
operation of permit trading system and on
impact of trading ontechnological change
 Till now only air and water pollution has
been targeted
 MBI are in the center of attention
 No single instrument for all problems
 SO2 ATS has proven to be a success
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Questions to you wrt SO2 ATS
 Why auctioned permits would be more
efficient?
 Do you think some abuse of market power
is possible?
 What to do with “hot spots”?
 How can states influence emission
reduction under this system?

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