Markets for SO2 and NOx—what can we learn for carbon trading?

While the pros and cons of CO2 emissions trading are discussed intensively in climate policies, it has rarely been acknowledged that emissions trading schemes already exist in other policy fields. This holds true in particular for noncarbon‐related air quality management policies in the United States that have existed for almost 20 years. There have been (and still are) many lessons learned from these existing emissions trading markets for the functioning and the design of carbon trading schemes. This article describes the history and design features of the three most important noncarbon US programs in air quality management: the domestic SO2 Acid Rain Program, the Regional Clean Air Incentives Market (RECLAIM) in Southern California addressing SO2 and NOx, and the NOx Budget Program in the Northeastern states of the United States focusing on the decrease of summer ozone. Special attention is given to the question as to whether these programs were successful with respect to (1) the functioning of the markets, (2) their cost‐effectiveness, and (3) their environmental effectiveness. This article addresses lessons learned that were found in the literature based on the assessments of these policies for carbon policies. Lessons learned include, inter alia, rules to increase companies' flexibility (e.g., banking of allowances); grandfathering as political‐motivated allocation rule; design options to reduce uncertainties, transaction costs, and rent seeking of special interest groups; monitoring and enforcement regulation; and the idea of focusing on learning and flexible systems. WIREs Clim Change 2011 2 635–646 DOI: 10.1002/wcc.123 This article is categorized under: The Carbon Economy and Climate Mitigation > Policies, Instruments, Lifestyles, Behavior