SO2 Allowance Research Articles

Identifying Beliefs in Continuous-Action Dynamic Models: An Application to the U.S. SO2 Allowance Market

Abstract I propose a new method of identifying firms’ subjective beliefs in dynamic models. In settings where actions are continuous and substitutable in contributing to an endogenous state, I show how beliefs about exogenous state transitions can be separately identified from static payoffs. Applying this method to identifying beliefs about future SO2 allowance prices in the U.S. Acid Rain Program, I find that electric utilities underestimate the movements in the allowance price, leading to compliance strategies that respond too slowly to changing market conditions. Biased beliefs increase an average utility’s compliance cost by equivalently 11.2% of its profits.

Facilitate, don't forbid, trade between conservationists and resource harvesters

University of Hawaii Press, Honolulu, Hawaii, USA. Smith, M. D., et al. 2010. Sustainability and global seafood. Science 327:784–786. Squires, D., R. Allen, and V. Restreppo. In press. Rights-based management in international tuna fisheries. FAO Fisheries and Aquaculture Technical Paper Number 571. Food and Agriculture Organization of the United Nations, Rome, Italy. Stavins, R. N. 1998. What can we learn from the grand policy experiment? Lessons from SO2 allowance trading. Journal of Economic Perspectives 12(3):69–88. Stigler, G. J., and G. S. Becker. 1977. De gustibus non est disputandum. American Economic Review 67:76–90. Stringer, K. 2006. Pacific Island microstates: Pawns or players in Pacific Rim diplomacy? Diplomacy and Statecraft 17:547– 577. Sumaila, U. R., J. Alder, and H. Keith. 2006. Global scope and economics of illegal fishing. Marine Policy 30.6 696–703. Thaler, R. H., and C. R. Sunstein. 2008. Nudge: Improving decisions about health, wealth, and happiness. Yale University Press, New Haven, Connecticut, USA. Webster, D. G. 2010. The irony and the exclusivity of Atlantic bluefin tuna management. Marine Policy 35:249–251.

The So2 Allowance Trading System and the Clean Air Act Amendments of 1990: Reflections on Twenty Years of Policy Innovation

The introduction of the U.S. SO2 allowance-trading program to address the threat of acid rain as part of the Clean Air Act Amendments of 1990 is a landmark event in the history of environmental regulation. The program was a great success by almost all measures. This paper, which draws upon a research workshop and a policy roundtable held at Harvard in May 2011, investigates critically the design, enactment, implementation, performance, and implications of this path-breaking application of economic thinking to environmental regulation. Ironically, cap and trade seems especially well suited to addressing the problem of climate change, in that emitted greenhouse gases are evenly distributed throughout the world’s atmosphere. Recent hostility toward cap and trade in debates about U.S. climate legislation may reflect the broader political environment of the climate debate more than the substantive merits of market-based regulation.

The SO2 Allowance Trading System and the Clean Air Act Amendments of 1990: Reflections on Twenty Years of Policy Innovation

The introduction of the U.S. SO2 allowance-trading program to address the threat of acid rain as part of the Clean Air Act Amendments of 1990 is a landmark event in the history of environmental regulation. The program was a great success by almost all measures. This paper, which draws upon a research workshop and a policy roundtable held at Harvard in May 2011, investigates critically the design, enactment, implementation, performance, and implications of this path-breaking application of economic thinking to environmental regulation. Ironically, cap and trade seems especially well suited to addressing the problem of climate change, in that emitted greenhouse gases are evenly distributed throughout the world's atmosphere. Recent hostility toward cap and trade in debates about U.S. climate legislation may reflect the broader political environment of the climate debate more than the substantive merits of market-based regulation.

A Virtual Field Trip to the Real World of Cap and Trade: Environmental Economics and the EPA SO2 Allowance Auction

In the spring of 2001, Bates College Environmental Economics classes bought their first sulfur dioxide emissions allowance at U.S. Environmental Protection Agency's annual auction, then conducted by the Chicago Board of Trade. In the spring of 2010, they bought their 22nd through 34th allowances. This article describes a three-part method for teaching the theory and practice of tradable pollution allowances or cap and trade. Experiential learning allows for theoretical economic concepts to become engrained in a deeper way via hands-on experience. Assessment through student surveys suggests that students do solidify their knowledge of complex concepts such as discounting and efficient allowance prices with trading via this three-part technique.

Trading Equity for Efficiency in Environmental Protection? Environmental Justice Effects from the SO2 Allowance Trading Program*

Objective. Arthur Okun made plain the fundamental conflict between efficiency and equity that arises in the pursuit of policy goals (Okun, 1974). Although Okun was speaking about government tax and spending policy, the potential conflict between efficiency and equity is also manifest at the nexus of two of the most far-reaching changes in the environmental policy arena: the adoption of market-like tools for pollution control and the quest for environmental justice. The article assesses this potential tradeoff by determining whether the pursuit of efficiency through the Clean Air Act Amendment's (CAA) sulfur dioxide allowance trading program (ATP) inadvertently transfers pollution into poor and minority communities. Methods. I employ Probit, Tobit, and GLS models using data for all SO2 trading activity between January 1995 and March 2009 to estimate whether allowance trading concentrates SO2 emissions in poor communities and communities of color. When using these models, I control for sample selectivity and for possible bias stemming from the modifiable areal unit problem. Results. The ATP does not concentrate sulfur dioxide emissions in black or Hispanic communities. To the contrary, communities with high percentages of black and Hispanic residents experience fewer imports of sulfur dioxide. Allowance trading does transfer SO2 emissions into poorly educated communities. Conclusions. There is no inherent tradeoff between efficiency and equity when using market-based instruments for pollution control. Policymakers, however, might make an effort to design and implement future emissions trading programs in a manner that reduces the monitoring costs of tracking emissions trading. By reducing monitoring costs, policymakers may prevent the concentration of emissions in poorly educated communities while preserving the efficiency benefits of these instruments.

Temporary sequestration credits: an instrument for carbon bears

Temporary crediting of carbon storage is an instrument that allows entities with emissions reductions obligations to defer some obligations for a fixed period of time. This instrument provides a means of guaranteeing the environmental integrity of a carbon sequestration project. But because the user of the temporary credit takes on the liability of renewing it, or replacing it with a permanent credit, the temporary credit must sell at a discount compared to a permanent credit. We show that this discount depends on the expected change in price of a permanent credit. Temporary credits have value only if restrictions on carbon emissions are not expected to tighten substantially. The intuition is illustrated by assessing the value of a hypothetical temporary sulfur dioxide sequestration credit, using historical data on actual SO2 allowance prices.

Productivity and Profitability Changes in U.S. Electric Utility Plants under the SO2 Allowance System

We examine the productivity and profitability changes in the US electric generating plants during the SO2 trading regime. Input distance function is used to compute the cumulative Malmquist productivity and Fisher productivity indexes. By exploiting the duality between cost and input distance functions, we obtain a measure of profitability, as an approximation for the Fisher productivity index. We measure productivity and profitability changes when SO2 emissions are ignored in the production technology and when these emissions appear as bad output. We find that the productivity is higher when the bad outputs are modeled as weakly disposable in comparison to the situation when they are modeled as freely disposable. But we do not find any significant difference in profitability under these alternative methods of modeling of production technology concerning the disposability of bad outputs.

An Empirical Study of the SO2 Allowance Market: Effects of PUC Regulations

This paper investigates electric utility behavior under the SO2 allowance market in Phase I. The probit model shows that cost recovery rules promoted high sulfur coal usage for utilities located in states with coal mines. A simulation shows that protecting these local coal industry increased high sulfur coal usage by 50%. Another finding is that the uncertainty of PUC regulations pushed utilities from the allowance market toward fuel switching/blending. Since the second effect was stronger than the first, the overall PUC regulations contributed to an unexpectedly low allowance price at the beginning of Phase I.

Sulfur Dioxide Control by Electric Utilities: What Are the Gains from Trade?

Title IV of the 1990 Clean Air Act Amendments (CAAA) established a market for transferable sulfur dioxide (SO2) emission allowances among electric utilities. This market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit SO2 from firms with lower costs, and this is expected to yield cost savings compared to a command‐and‐control approach to environmental regulation. This paper uses econometrically estimated marginal abatement cost functions for power plants affected by Title IV of the CAAA to evaluate the performance of the SO2 allowance market. Specifically, we investigate whether the much‐heralded fall in the cost of abating SO2, compared to original estimates, can be attributed to allowance trading. We demonstrate that, for plants that use low‐sulfur coal to reduce SO2 emissions, technical change and the fall in prices of low‐sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985. The flexibility to take advantage of these changes is the main source of cost reductions, rather than trading per se. In the long run, allowance trading may achieve cost savings of $700–$800 million per year compared to an “enlightened” command‐and‐control program characterized by a uniform emission rate standard. The cost savings would be twice as great if the alternative to trading were forced scrubbing. However, a comparison of potential cost savings in 1995 and 1996 with modeled costs of actual emissions suggests that most trading gains were unrealized in the first two years of the program.

What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading

The most ambitious application ever attempted of a market-based approach to environmental protection has been for the control of acid rain under the Clean Air Act amendments of 1990, which established a sulfur dioxide allowance trading program. This essay identifies lessons that can be learned from this grand experiment in economically oriented environmental policy. The author examines positive political economy lessons, asking why this system was adopted from acid-rain control in 1990, and he considers normative lessons that can be learned from the program's structure and performance, focusing on lessons for the design and implementation of future systems.

95/00853 The environment and economics. The impact of restricting the SO 2 allowance market

95/00853 The environment and economics. The impact of restricting the SO 2 allowance market

The USSR's Experience with Economic Incentive Approaches to Pollution Control

While the United States is perceived to be the world leader in applying economic instruments to reach pollution reduction targets, many other OECD and East European countries are also applying these tools. And though much has been written about the US experience—offsets, bubbles, netting, emissions banking, and SO2 allowance trading—little is known about the use of pollution charges within the former Soviet Union. This paper summarizes the early experience with pollution charges in the Soviet Union. It is worth noting that though circumstances in Russia are fast changing. As of June 1992, the pilot projects described in this paper now appear to be the foundation for a widely developed pollution charge program.

Implications of the Clean Air Act acid rain title on industrial boilers

AbstractThis paper discusses the impacts of the 1990 Clean Air Act Amendments related to acid rain controls, as they apply to industrial boilers. Emphasis is placed on explaining the Title IV provisions of the Amendments that permit “nonutility” sources to participate in the SO2 allowance system. The allowance system, as it pertains to industrial boiler operators, is described, and the opportunities for operators to trade and/or sell SO2 emission credits is discussed.The paper also reviews flue gas desulfurization system technologies available for industrial boiler operators who may choose to participate in the system. Furnace sorbent injection, advanced silicate process, lime spray drying, dry sorbent injection, and limestone scrubbing are described, including statements of their SO2 removing capability, commercial status, and costs. Capital costs, levelized costs and cost‐effectiveness are presented for these technologies.