Sulfur Dioxide Allowances: The Price of Pollution

Journal of Financial Education, Vol. 31, pp. 118-126, Winter 2005

11 Pages Posted: 27 Feb 2006

See all articles by Susan V. White

Susan V. White

University of Maryland - Department of Finance

Ramesh K. S. Rao

University of Texas at Austin - Department of Finance

Abstract

This case discusses a method for enforcing the Clean Air Act's acid rain provisions. Utilities may purchase sulfur dioxide allowances, which give them permission to emit a certain amount of the pollutant, or they may install pollution control equipment or use low sulfur fuel. Which alternative is more cost-effective for a utility at a given point in time? This case gives students the opportunity to apply option pricing principles to a company's decision to purchase clean air equipment versus buying the right to pollute.

Keywords: Case study, sulfur dioxide, options

JEL Classification: G13,G31,G38

Suggested Citation

White, Susan V. and Rao, Ramesh K. S., Sulfur Dioxide Allowances: The Price of Pollution. Journal of Financial Education, Vol. 31, pp. 118-126, Winter 2005. Available at SSRN: https://ssrn.com/abstract=884451

Susan V. White (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

Ramesh K. S. Rao

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-475-8756 (Phone)
512-471-5073 (Fax)

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