Voluntary Compliance with Market‐Based Environmental Policy: Evidence from the U. S. Acid Rain Program

Abstract

The U. S. Acid Rain Program implemented a nationwide market for electric utilities' sulfur dioxide (SO2) emissions and included voluntary compliance possibilities for nonaffected sources. I observe significant voluntary participation‐albeit with small impact on the SO2 market‐mostly from sources with counterfactual emissions below their allowance allocations. An ex post analysis suggests that costs from the resulting higher emissions outweigh savings from shifts in emissions reductions from high‐cost affected sources to low‐cost nonaffected sources. Further, utilities' voluntary participation is well explained by economic variables, which provides new evidence of cost‐effective compliance strategies and low transaction costs.