ECONOMICS OF POLLUTION TRADING FOR SO₂AND NO_X

Abstract

▪ Abstract For years economists have urged policy makers to use market-based approaches such as cap-and-trade programs or emission taxes to control pollution. The sulfur dioxide (SO2) allowance market created by Title IV of the 1990 U.S. Clean Air Act Amendments represents the first real test of the wisdom of economists’ advice. Subsequent urban and regional applications of nitrogen oxides (NOx) emission allowance trading took shape in the 1990s in the United States, culminating in a second large experiment in emissions trading in the eastern United States that began in 2003. This review provides an overview of the economic rationale for emissions trading and a description of the major U.S. programs to reduce SO2 and NOx pollution. We evaluate these programs along measures of performance, which include cost savings, environmental integrity, and incentives for technological innovation. We offer lessons for the design of future programs including, most importantly, those to reduce carbon dioxide.

The design, testing and implementation of Virginia’s NOx allowance auction

“…There is an active private market for the trading of NOx 2 These characteristics of the commodities that were to be auctioned are discussed in section II 3 In more inelastic demand environments the clock auctions become relatively less advantageous for revenue generation. 4 For an excellent synopsis of this and related programs see Burtraw et al (2005 Each state has a NOx emissions budget, and has considerable flexibility in allocating its budgeted emission allowances to sources. In Virginia, allowances specific to their year of issuance are allocated to firms for whom NOx emissions are a byproduct of production.…”

Trading for the future: Signaling in permit markets

“…These have suggested that the gains from trade are huge, with cost-savings that in some cases exceed 90 percent of the abatement costs compared to 'command-and-control' (Tietenberg, 1992. See also Carlson et al, 2000;Burtraw et al, 2005). However, compared with observed abatement, they find that only parts of the potential savings are realized.…”

Making things the same: Gases, emission rights and the politics of carbon markets

“…The crucial development was the start of sulphur-dioxide trading in the US in 1995 (for which see, especially, Ellerman et al, 2000 andBurtraw et al 2005). It had been known for twenty years or more that damage to the environment and to human health was being caused by sulphur-dioxide emissions, notably from coal-fired power stations, which react in the atmosphere to produce 'acid rain' and other acid depositions.…”

“…Allowance prices of $400 a ton were predicted, but in fact prices averaged around $150 or less in the early years of the scheme. The flexibility that trading gave to utilities helped to reduce costs (by around a half compared to having to meet a standard that imposed a uniform maximum emission rate: see Ellerman et al, 2000 andBurtraw et al, 2005) but other factors were equally important.…”