The US SO2 or Acid Rain Program

							The US SO2 or Acid Rain Program
• What made this program a success?

Seminar on Emissions trading – Paris 1 Presentation by Roland Riachy and Julien Chevallier 06/04/2006
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Stavins (1998)
2) "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading", the Journal of Economic Perspectives, Vol. 12, 3, pp. 69-88

Highlights  Political Economy  Normative Lessons  Question of political feasibility
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Highlights (1)
• Phase I units: cut SO2 emissions by 50% below 1980 levels by 2010 (10 M tons). • Est. 1990, legally binding in 1995. • Grandfathering (baseline period 85-87). • Limited auctioning (3% of total allowance). • Banking allowed. Penalty $2,000/ton. • Phase II units start on 01/01/ 2000.
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Highlights (2)
• Significant emissions reductions achieved by 2004 (7 M. tons according to EPA). • Banking > 7.5 M. tons by 2004. • Trading > 15 M. tons in 2004. • Estimated cost-savings (relative to C&C): $1 billion / year. • Reduced human risk of premature mortality: (EPA reports a 40-to-1 benefit to cost ratio).
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Political Economy (1): C&C vs. MBIs
Regulatory Demand Regulatory Supply •Fears: •Lawyers’ vested "licenses to pollute"; interests in C&C. "hot spots". •Grassroots politics.

•Puzzles: monetization of externalities.

•Uncertainty about distributional impacts of MBIs.
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Political Economy (2): Political acceptance of MBIs
Motivating factors •Necessity to take action against "new" environmental problems. •Cost effective solutions more appealing as a csq of increased pollution control costs ($125 billion in 1990, 3x 1972). •Role of the EPA & environmental lobbies. Hurdles •Better understanding of various instruments?
•Trading barriers in high sulfur coal mining states.

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Political Economy (3): Grandfathering
Regulatory Demand Regulatory Supply •Rent seekers. •Less burdensome. •Entry Barriers. •Formation of majority coalition.

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Normative lessons (1): Overall, well designed program...
• Simplicity (unique allocation formula, absolute baseline). • Flexibility (importance of banking). • Distributional issues taken care of by the Congress. • Stiff penalties. Near 100% compliance. • No requirement for government approval induced low transaction costs (estimated $0,50/ton). • Positive role of private actors in the development of brokerage.
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Normative lessons (1 ctd): But politically viable programs can be more costly than anticipated
• Significant monitoring costs; • Post-trading equilibrium sensitive to initial allocation; • Auctioning would reduce costs of SO2 program by 25%.
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Normative lessons (2): how to measure "success" ?
• Effects of pre-existing regulatory envt. • Aggregate cost savings rather than number of trades or total trading volume. • Effect on technology innovation and diffusion. • Effect of regulatory uncertainty. • Combine static and dynamic analysis.
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Normative lessons (3): Guidelines to use MBIs
• Where the cost of abating pollution differs widely among sources; • Great degree of pollutants to mix in the atmosphere; • When transaction costs are low; • Compare compliance costs with environmental benefits to determine the appropriate level of emissions reduction.
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Question of political feasibility
« Policy instruments that appear impeccable from the vantage point of Cambridge, Mass., but consistently prove infeasible in Washington, D.C., can hardly be considered "optimal" . » (p.83)

How to apply the results of this experiment to other envtal pbs (e.g. climate change) ?
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