Markets for Clean Air: The U.S. Acid Rain Program

by A. Denny Ellerman , Paul L. Joskow , Richard Schmalensee , Juan-Pablo Montero , Elizabeth M. Bailey

• ISBN13: 9780521660839
• ISBN10: 0521660831
• Format: Hardcover
• Copyright: 2000-06-19
• Publisher: Cambridge University Press

Summary

A comprehensive description and evaluation of the first three years of the U.S. Acid Rain Program. This environmental control program is the world's first large-scale use of a tradeable emission permit system for achieving environmental goals. The book analyzes the behavior and performance of the market for emissions permits, known as allowances, and quantifies emission reductions, compliance costs, and cost savings associated with the trading program. The book also includes chapters on the historical context in which this pioneering program developed and the political economy of allowance allocations. Finally, the book discusses the program's successes, its weaknesses, and the lesson learned regarding application of the emissions-trading approach to controlling other types of emissions, including greenhouse gases. The volume is an indispensable addition to the library of all interested in the application of marker principles for meeting environmental goals.

Table of Contents

List of Illustrations	xi
List of Tables	xiii
Preface	xvii
Acknowledgments	xxi
Part I. Background	1	(106)
A Market-Based Experiment	3	(10)
A Star Is Born (?)	3	(2)
The U.S. Acid Rain Program	5	(4)
Overview of the Book	9	(4)
A Political History of Federal Acid Rain Legislation	13	(18)
Early History of Federal Regulation of SO2 Emissions	13	(8)
Legislative History of the 1990 Acid Rain Program	21	(10)
The Political Economy of Allowance Allocations	31	(46)
Competing Theories of Distributive Politics	31	(5)
The Allowance ``Pie''	36	(3)
Phase I Allowance Allocations	39	(4)
Phase II Allowances	43	(5)
Alternative Phase II Allocation Rules	48	(5)
Gainers and Losers from Alternative Phase II Allocation Rules	53	(8)
Hypothetical Votes on Phase II Allocations	61	(3)
Estimating Political Determinants of Allowance Allocations	64	(11)
A Majoritarian Equilibrium	75	(2)
The Pre-1995 Trend in SO2 Emissions	77	(30)
Expected versus Actual SO2 Emissions	77	(3)
The Economics of Coal Choice	80	(2)
Historical Patterns in Rail and Coal Prices	82	(7)
Econometric Analysis	89	(15)
Rail-rate Deregulation Reduces SOZ Emissions	104	(3)
Part II. Compliance and Trading	107	(144)
Title IV Compliance and Emission Reductions, 1995--97	109	(32)
Perfect Compliance and Significant Emission Reductions	109	(1)
Counterfactual Emissions	110	(8)
Emissions Reductions Resulting from Title IV	118	(23)
Emissions Trading: The Effect on Abatement Behavior	141	(26)
Unit-level Emissions Trading	141	(2)
Some Classifications and Definitions	143	(6)
Overcompliance	149	(2)
Excess Allowances	151	(3)
Current Demand for Allowances	154	(7)
Banking of Allowances	161	(4)
From Internal to External Trading	165	(2)
Emissions Trading: Development of the Allowance Market	167	(30)
Annual EPA Auctions	169	(3)
Emergence of the Private Allowance Market	172	(18)
Influence of State Electric Utility Regulation on Allowance Trading	190	(5)
The Allowance Market Works	195	(2)
Title IV's Voluntary Compliance Program	197	(24)
Patterns of Voluntary Compliance	198	(5)
The Decision to Volunteer	203	(10)
Effects on the SO2 Market	213	(2)
Implications for Program Design	215	(4)
Adverse Selection Is a Problem	219	(2)
Cost of Compliance with Title IV in Phase I	221	(30)
Confusion about Control Costs	221	(2)
Assumptions and Data Sources	223	(5)
Estimates of Phase I Costs of Compliance	228	(7)
The Cost of Abatement by Scrubbing	235	(7)
The Cost of Abatement by Switching to Lower-Sulfur Coal	242	(6)
Monitoring Costs	248	(3)
Part III. Questions and Implications	251	(72)
Cost Savings from Emissions Trading	253	(44)
Cost Savings Is the Goal	253	(1)
Evidence of Cost Savings	254	(6)
Basic Analytic Framework	260	(10)
Positioning the Title IV Cost Curves	270	(10)
Cost-Saving Estimates	280	(14)
Substantial and Real Cost Savings	294	(3)
Errors, Imperfections, and Allowance Prices	297	(17)
Unexpected Behavior at Allowance Prices	297	(2)
Some Unconvincing Hypotheses	299	(3)
Expectation Errors and Overinvestment	302	(7)
Puzzles and Future Price Trends	309	(3)
A Better Alternative Policy?	312	(2)
Concluding Observations	314	(9)
Trading Can Work	315	(1)
Politics Don't Matter	316	(1)
Markets Can Develop	317	(2)
Trading Handles Surprises	319	(1)
Opt-in Provisions Are Tricky	320	(1)
Extrapolate with Care	321	(2)
Appendix: Effect of Title IV on SO2 Emissions and Heat Input	323	(20)
Susanne M. Schennach
Introduction	323	(1)
Data	324	(1)
Specification of the Model	324	(5)
Results	329	(5)
Effect of Title IV on Utilization	334	(7)
Conclusion	341	(2)
Bibliography	343	(10)
Index	353