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

I n the late 1980s, there was growing concern in the United States and other countries that acid precipitation—the result of emissions of sulfur dioxide (SO2) and, to a lesser extent, nitrogen oxides (NOx) reacting in the atmosphere to form sulfuric and nitric acids —was damaging forests and aquatic ecosystems, particularly in the US Northeast and southern Canada. In the United States, fl ue gas emissions from coal-fi red, electric generating plants were the primary source of SO2 emissions and a major source of NOx emissions. In response to this and other concerns, the US Congress passed and President George H. W. Bush signed into law the Clean Air Act Amendments of 1990. Title IV of this law (which took up only 16 percent of its total pages) launched a grand experiment in market-based environmental policy: the path-breaking SO2 allowance trading program. The concept of allocating permits to emit a certain quantity of pollution that would phase down over time, while allowing permit-holders to trade their permits, is now broadly familiar. But two decades ago, this cap-and-trade approach to environmental protection was quite novel. Many in the environmental community—with the prominent exception of the Environmental Defense Fund—were hostile to the notion of trading “rights to pollute”; others doubted the workability of such a scheme. Nearly all pollution regulations took a much more prescriptive The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment