THE US MARKET FOR SO2 PERMITS - POLICY IMPLICATIONS OF THE LOW PRICE AND TRADING VOLUME

The price of SO2 permits and the volume of trading under the US Acid R ain Program have been lower than expected. This can be explained by th e creation and distribution of more permits than were initially author ized, by the sale of permits by high cost abaters who are subject to m ore stringent local emission constraints or who have irreversibly inve sted in high cost abatement technologies and by the deregulation of th e natural gas and railroad industries which, in combination with incen tives for cost-cutting under the new market approach to SO2 control, h as lowered marginal costs of abatement curves and made them more unifo rm across powerplants. The low price of permits and low trading volume are evidence that market approaches to pollution control can be more cost-effective than command and control regulations. The effect of pub lic policies and technological changes on the allowance market are use fully examined in the context of an ideal market, in which the equilib rium price of allowances equals the marginal cost of abatement of indi vidual powerplants. Using recent data from Coggins and Swinton (1996), we are able to explain the current price of permits with some accurac y. Copyright (C) 1996 Elsevier Science Ltd.