Sulfur Dioxide Emissions and Market Effects under the Clean Air Act Acid Rain Program

Abstract

ABSTRACT The Clean Air Act Amendments of 1990 (CAAA90) established a national program to control sulfur dioxide (SO2) emissions from electricity generation. CAAA90's market-based approach includes trading and banking of Soumissions allowances. We analyzed data describing electric utility SO2 emissions in 1995, the first year of the program's Phase I, and market effects over the 1990-1995 period. Fuel switching and flue-gas desulfurization were the dominant means used in 1995 by targeted generators to reduce emissions to 51% of 1990 levels. Flue-gas desulfur-ization costs, emissions allowance prices, low-sulfur coal prices, and average sulfur contents of coals shipped to electric utilities declined over the 1990-1995 period. Projections indicate that 13-15 million allowances will have been banked during the program's Phase I, which ends in 1999, a quantity expected to last through the first decade of the program's stricter Phase II controls. In 1995, both allowance prices and SO2 emissions were below pre-CAAA90 expectations. The reduction of SO2 emissions beyond pre-CAAA90 expectations, combined with lower-than-expected allowance prices and declining compliance costs, can be viewed as a success for market-based environmental controls.