FEEM working papers "Note di lavoro" series
2012 .060

The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment


Authors: Richard Schmalensee, Robert N. Stavins
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Keywords: Market-based Instruments, Cap-and-trade, Clean Air Act Amendments of 1990, Sulfur Dioxide, Acid Rain
JEL n.: Q540, Q580, Q400, Q480

Abstract

Two decades have passed since the Clean Air Act Amendments of 1990 launched a grand experiment in market-based environmental policy: the SO2 cap-and-trade system. That system performed well but created four striking ironies. First, by creating this system to reduce SO2 emissions to curb acid rain, the government did the right thing for the wrong reason. Second, a substantial source of this system’s cost-effectiveness was an unanticipated consequence of earlier railroad deregulation. Third, it is ironic that cap-and-trade has come to be demonized by conservative politicians in recent years, since this market-based, cost-effective policy innovation was initially championed and implemented by Republican administrations. Fourth, court decisions and subsequent regulatory responses have led to the collapse of the SO2 market, demonstrating that what the government gives, the government can take away.

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