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 Rain Program have been lower than expected. This can be explained by the creation and distribution of more permits than were initially authorized, by the sale of permits by high cost abaters who are subject to more stringent local emission constraints or who have irreversibly invested in high cost abatement technologies and by the deregulation of the natural gas and railroad industries which, in combination with incentives for cost-cutting under the new market approach to SO₂ control, has lowered marginal costs of abatement curves and made them more uniform 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 public policies and technological changes on the allowance market are usefully examined in the context of an ideal market, in which the equilibrium price of allowances equals the marginal cost of abatement of individual powerplants. Using recent data from Coggins and Swinton (1996), we are able to explain the current price of permits with some accuracy.