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SO2 Allowance Trading: How Experience and Expectations Measure Up


  • Burtraw, Dallas

    () (Resources for the Future)

  • Bohi, Douglas


The SO2 trading program has achieved reductions in emissions ahead of schedule, with allowance prices below the marginal costs that were anticipated for the program. This paper explores the experience with the program and proposes a taxonomy of reasons why allowance prices are low. The overarching reason is that the most costly investments to accommodate full emission reductions have been successfully delayed. Application of a discount rate to these long run marginal costs yields an estimate of allowance price close to that observed today. Several factors have contributed to the delay in bearing these costs, and helped to reduce their magnitude. One group of factors stems from market fundamentals, especially the cost of rail transport of low sulfur coal. A second group includes the influences of state and federal regulators. A third group includes distinctions from the "imagined" program compared to that which was actually been enacted.

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  • Burtraw, Dallas & Bohi, Douglas, 1997. "SO2 Allowance Trading: How Experience and Expectations Measure Up," Discussion Papers dp-97-24, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-97-24

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    Cited by:

    1. Daniel Phaneuf & Till Requate, 2002. "Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(3), pages 369-390, July.
    2. Norris, Patricia E. & Brown, Elaine M. & Batie, Sandra S., 2002. "An Analysis Of Situation, Structure, Conduct And Performance In Air Emission And Watershed Effluent Markets," Staff Papers 11798, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    3. Stratford Douglas & Seth Wiggins, 2015. "Effects of Acid Rain Regulations on Production of Eastern Coals of Varying Sulfur Content," Working Papers 15-38, Department of Economics, West Virginia University.
    4. Revesz, Richard & Stavins, Robert, 2004. "Environmental Law and Policy," Working Paper Series rwp04-023, Harvard University, John F. Kennedy School of Government.
    5. Brookshire, David S & Burness, H Stuart, 2001. "The Informational Role of the EPA SO2 Permit Auction," Journal of Regulatory Economics, Springer, vol. 20(1), pages 43-60, July.
    6. Ben-David, Shaul & Brookshire, David S. & Burness, Stuart & McKee, Michael & Schmidt, Christian, 1999. "Heterogeneity, Irreversible Production Choices, and Efficiency in Emission Permit Markets," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 176-194, September.
    7. Olivier Godard, 1998. "Les permis d'émission négociables et la lutte contre la pollution atmosphérique," Post-Print hal-00622857, HAL.
    8. Springer, Urs & Varilek, Matthew, 2004. "Estimating the price of tradable permits for greenhouse gas emissions in 2008-12," Energy Policy, Elsevier, vol. 32(5), pages 611-621, March.
    9. Shaul Ben-David & David Brookshire & Stuart Burness & Michael McKee & Christian Schmidt, 2000. "Attitudes toward Risk and Compliance in Emission Permit Markets," Land Economics, University of Wisconsin Press, vol. 76(4), pages 590-600.

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