The encyclopedia · Strategy & Leadership · Strategic decision · 1995–2010
The US capped SO2 emissions and let power plants trade the right to pollute.
The Acid Rain Program capped sulfur dioxide with fully tradable allowances, cutting emissions below target at about a third less than command-and-control.
U.S. Environmental Protection Agency · electric utilities
the move
The 1990 Clean Air Act Amendments set a goal of cutting sulfur dioxide from power plants by ten million tons below 1980 levels. Rather than force every plant to install a scrubber, the Acid Rain Program put a cap and a market in place.
The EPA set a permanent cap and allocated allowances, each permitting one ton of SO2, to units over 25 megawatts. A plant could comply by scrubbing, switching to low-sulfur coal, or buying allowances, whichever was cheapest.
The market beat the forecast. In the first year utilities cut emissions 40% more than required, and the total cost of a 3.9-million-ton reduction was $726 million, about $186 a ton, matching the most optimistic predictions. MIT researchers estimated trading cut compliance costs by about a third versus comparable alternatives.
why it works
- A tradable allowance sends reductions to the plant with the cheapest abatement, not the best lobby.
- The cap guarantees the environmental result regardless of how individual plants comply.
- Allowances can be banked, so a utility can cut early and use the saving later.
- Fears of 'hot spots' were not realized: emissions fell in every state.
what transfers
When abatement costs differ, do not mandate the same technology for everyone: cap the total, issue tradable rights, and let the market find the cheapest cuts.
what came after
Sulfur-dioxide emissions fell well below the cap and the program became the reference model for later cap-and-trade systems, including the European Union's and RGGI. Allowance prices later collapsed as new rules cut demand, reminding pundits that the mechanism is powerful but not proof against changing regulation.
references
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