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

Journal of Economic Perspectives, Forthcoming

HKS Working Paper No. RWP12-030

20 Pages Posted: 5 Aug 2012 Last revised: 19 Sep 2012

See all articles by Richard Schmalensee

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Robert N. Stavins

Harvard University - Harvard Kennedy School (HKS); Resources for the Future; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 3, 2012

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.

Keywords: market-based instruments, cap-and-trade, Clean Air Act amendments of 1990, sulfur dioxide, acid rain

JEL Classification: Q54, Q58, Q40, Q48

Suggested Citation

Schmalensee, Richard and Stavins, Robert N., The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment (August 3, 2012). Journal of Economic Perspectives, Forthcoming; HKS Working Paper No. RWP12-030. Available at SSRN: https://ssrn.com/abstract=2124037 or http://dx.doi.org/10.2139/ssrn.2124037

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Robert N. Stavins (Contact Author)

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