The Temporal Efficiency of SO2 Emissions Trading

This paper provides an empirical evaluation of the temporal efficiency of the U.S. Acid Rain Program, which implemented a nationwide market for trading and banking sulfur dioxide (SO2) emission allowances. We first develop a model of efficient banking and select appropriate parameter values. Then, we use aggregate data from the first seven years of the Acid Rain Program, to assess the temporal efficiency of the observed banking behavior. We find that banking has been surprisingly efficient and we discuss why this finding disagrees with the common perception of excessive banking in this program. * Ellerman is with the Center for Energy and Environmental Policy Research (CEEPR) and the Sloan School of Management, Massachusetts Institute of Technology (MIT). Montero < [email protected] > is with the Department of Economics, Catholic University of Chile, and he was a visiting professor at the Sloan School of Management during the writing of this paper. We thank Paul Joskow, Matti Liski, Robert Stavins, Robert Pindyck, Dick Schmalensee, Stephen Smith, Martin Weitzman and seminar participants at Harvard, MIT and University College London for useful comments; Brice Tariel for research assistance; and CEEPR and the U.S. EPA (STAR grant award #R-82863001-0) for financial support.