The Social Cost of Trading: Measuring the Increased Damages from Sulfur Dioxide Trading in the United States

The sulfur dioxide (SO2) cap and trade program established in the 1990 Clean Air Act Amendments is celebrated for reducing abatement costs ($0.7 to $2.1 billion per year) by allowing emissions allowances to be traded. Unfortunately, places with high marginal costs also tend to have high marginal damages. Ton-for-ton trading reduces emissions in low damage areas (rural) while increasing emissions in high damage areas (cities). From 2000 to 2007, conservative estimates of the value of mortality risk suggest that trades increased damages from $0.8 to $1.1 billion annually relative to the initial allowance allocation and from $1.5 to $1.9 billion annually relative to a uniform performance standard. With U.S. Environmental Protection Agency (USEPA) values, trades increased damages from $2.4 to $3.2 billion annually compared to the initial allowance allocation and from $4.4 to $5.4 billion compared to a uniform performance standard. It is not clear that the ton-for-ton SO2 cap and trade program is actually more efficient than comparable command and control programs. The trading program needs to be modified so that tons are weighted by their marginal damage. © 2011 by the Association for Public Policy Analysis and Management.