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Innovation Under the Tradable Sulfur Dioxide Emission Permits Program in the U.S. Electricity Sector

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  • Burtraw, Dallas

    (Resources for the Future)

Abstract

The 1990 U.S. Clean Air Act Amendments (CAAA) instituted a national program in tradable sulfur dioxide (SO2) emission permits, referred to as "emission allowances," in the U.S. electricity sector. This paper provides a survey and assessment of the SO2 allowance trading program with a focus on the role of innovation. Over the last decade the cost of compliance has fallen dramatically compared with most expectations, and today the total cost of the program is 40– 140% lower than projections (depending on the timing of those projections and the counter-factual baseline considered). Marginal costs of reductions are less than one-half the cost considered in most analyses at the time the program was introduced. Innovation accounts for a large portion of these cost savings, but not as typically formulated in economic models of research and development (R&D) efforts to obtain patent discoveries. Innovation under the SO2 allowance trading program involves organizational innovation at the firm, market and regulatory level and process innovation by electricity generators and upstream fuel suppliers. An important portion of the cost reductions that are evident was already in the works prior to and independent of the program. Nonetheless, the allowance trading program deserves significant credit for providing the incentive and flexibility to accelerate and to fully realize exogenous technical changes that were occurring in the industry. This marks a significant departure from conventional approaches to environmental regulation, which would not be expected to capture these savings. The ongoing transition to restructuring of electricity markets and expanding competition in electricity generation complements the design of the SO2 allowance trading program by providing firms with full incentives to reduce costs of pollution control.

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  • Burtraw, Dallas, 2000. "Innovation Under the Tradable Sulfur Dioxide Emission Permits Program in the U.S. Electricity Sector," Discussion Papers dp-00-38, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-00-38
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    References listed on IDEAS

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    1. Burtraw, Dallas & Bohi, Douglas, 1997. "SO2 Allowance Trading: How Experience and Expectations Measure Up," Discussion Papers dp-97-24, Resources For the Future.
    2. Dallas Burtraw & Alan Krupnick & Erin Mansur & David Austin & Deirdre Farrell, 1998. "Costs And Benefits Of Reducing Air Pollutants Related To Acid Rain," Contemporary Economic Policy, Western Economic Association International, vol. 16(4), pages 379-400, October.
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    4. Burtraw, Dallas & Krupnick, Alan & Austin, David & Farrell, Deirdre & Mansur, Erin, 1997. "The Costs and Benefits of Reducing Acid Rain," Discussion Papers dp-97-31-rev, Resources For the Future.
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    Cited by:

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    2. Stefan Ambec & Alexis Garapin & Laurent Muller & Arnaud Reynaud & Carine Sebi, 2014. "Comparing Regulations to Protect the Commons: An Experimental Investigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(2), pages 219-244, June.
    3. Mundaca, Luis & Neij, Lena, 2009. "A multi-criteria evaluation framework for tradable white certificate schemes," Energy Policy, Elsevier, vol. 37(11), pages 4557-4573, November.
    4. Kemp, René & Pontoglio, Serena, 2011. "The innovation effects of environmental policy instruments — A typical case of the blind men and the elephant?," Ecological Economics, Elsevier, vol. 72(C), pages 28-36.
    5. Fabrizi, Andrea & Guarini, Giulio & Meliciani, Valentina, 2018. "Green patents, regulatory policies and research network policies," Research Policy, Elsevier, vol. 47(6), pages 1018-1031.
    6. Burtraw, Dallas, 2007. "State Efforts to Cap the Commons: Regulating Sources or Consumers?," Discussion Papers dp-07-49, Resources For the Future.
    7. Elbakidze, Levan & McCarl, Bruce A., 2007. "Sequestration offsets versus direct emission reductions: Consideration of environmental co-effects," Ecological Economics, Elsevier, vol. 60(3), pages 564-571, January.
    8. Stefan Ambec & Paul Lanoie, 2009. "Performance environnementale et économique de l’entreprise," Économie et Prévision, Programme National Persée, vol. 190(4), pages 71-94.
    9. Stefan Ambec & Paul Lanoie, 2007. "When and Why Does It Pay To Be Green?," CIRANO Working Papers 2007s-20, CIRANO.
    10. Berry, David, 2002. "The market for tradable renewable energy credits," Ecological Economics, Elsevier, vol. 42(3), pages 369-379, September.
    11. Paul Lanoie & Jérémy Laurent‐Lucchetti & Nick Johnstone & Stefan Ambec, 2011. "Environmental Policy, Innovation and Performance: New Insights on the Porter Hypothesis," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 803-842, September.
    12. David Grover, 2012. "The �advancedness� of knowledge in pollutionsaving technological change with a qualitative application to SO2 cap and trade," GRI Working Papers 100, Grantham Research Institute on Climate Change and the Environment.
    13. Burtraw, Dallas & Palmer, Karen & Krupnick, Alan & Evans, David & Toth, Russell, 2005. "Economics of Pollution Trading for SO2 and NOx," Discussion Papers dp-05-05, Resources For the Future.
    14. Krupnick, Alan & Darmstadter, Joel & Richardson, Nathan & McLaughlin, Katrina, 2015. "Putting a Carbon Charge on Federal Coal: Legal and Economic Issues," Discussion Papers dp-15-13, Resources For the Future.
    15. Kumar, Surender & Managi, Shunsuke, 2010. "Sulfur dioxide allowances: Trading and technological progress," Ecological Economics, Elsevier, vol. 69(3), pages 623-631, January.
    16. Stefan Ambec & Alexis Garapin & Laurent Muller & Carine Sebi, 2009. "Règlementation acceptable d’une ressource commune : une analyse expérimentale," Économie et Prévision, Programme National Persée, vol. 190(4), pages 107-122.
    17. MacGill, Iain & Outhred, Hugh & Nolles, Karel, 2006. "Some design lessons from market-based greenhouse gas regulation in the restructured Australian electricity industry," Energy Policy, Elsevier, vol. 34(1), pages 11-25, January.
    18. Atle Christer Christiansen, 2003. "Convergence or divergence? Status and prospects for US climate strategy," Climate Policy, Taylor & Francis Journals, vol. 3(4), pages 343-358, December.
    19. Grover, David, 2013. "The ‘advancedness’ of knowledge in pollution-saving technological change with a qualitative application to SO2 cap and trade," Ecological Economics, Elsevier, vol. 89(C), pages 123-134.
    20. Ming Yi & Xiaomeng Fang & Le Wen & Fengtao Guang & Yao Zhang, 2019. "The Heterogeneous Effects of Different Environmental Policy Instruments on Green Technology Innovation," IJERPH, MDPI, vol. 16(23), pages 1-19, November.
    21. Rassier, Dylan G. & Earnhart, Dietrich, 2015. "Effects of environmental regulation on actual and expected profitability," Ecological Economics, Elsevier, vol. 112(C), pages 129-140.
    22. David Popp, 2003. "Pollution control innovations and the Clean Air Act of 1990," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 22(4), pages 641-660.
    23. Boyce, James K., 2018. "Carbon Pricing: Effectiveness and Equity," Ecological Economics, Elsevier, vol. 150(C), pages 52-61.
    24. Janis Birkeland & Stephen Knight-Lenihan, 2016. "Biodiversity offsetting and net positive design," Journal of Urban Design, Taylor & Francis Journals, vol. 21(1), pages 50-66, February.

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