The So2 Allowance-trading System and the Clean Air Act Amendments of 1990: Reflections on 20 Years of Policy Innovation

The introduction of the U.S. SO2 allowance-trading program to address the threat of acid rain as part of the Clean Air Act Amendments of 1990 is a landmark event in the history of environmental regulation. The program was a great success by almost all measures. This paper, which draws upon a research workshop and a policy roundtable held at Harvard in May 2011, investigates critically the design, enactment, implementation, performance, and implications of this path-breaking application of economic thinking to environmental regulation. Ironically, cap-andtrade seems especially well suited to addressing the problem of climate change, in that emitted greenhouse gases are evenly distributed throughout the world’s atmosphere. Recent hostility toward cap-and-trade in debates about U.S. climate legislation may refl ect the broader political environment of the climate debate more than the substantive merits of market-based regulation.