Abstract
The US Acid Rain Program (ARP) has since 1990 allowed 1000 major electric utilities all over the USA to trade SO2 emission permits. Historical emission rights have heen grandfathered and the target level is a 50% reduction in SO2 emissions. Market performance has been successful, with much trade activity and unexpectedly low permit prices. Property rights to permits have been well defined, strictly enforced, and sources have been allowed to trade freely without the need for administrative approval for each transaction. Ignoring source location in this way has kept transaction costs at a minimum. In conclusion, the policy design of the ARP is recommendable for future environmental regulation where source location may be ignored, for example, for creating CO2 markets in the USA and the European Union.
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