Working Paper

The Impact of Trading on the Costs and Benefits of the Acid Rain Program

Apr 12, 2017 | H. Ron Chan, B. Andrew Chupp, Maureen L. Cropper, Nicholas Z. Muller

Summary

Enacted under the Clean Air Act Amendments of 1990 with the goal of reducing sulfur dioxide emissions from electric utilities, the Acid Rain Program is often cited as evidence that an emissions trading program can reduce the costs of pollution reduction. A team of researchers examines the compliance costs and health effects realized under the Acid Rain Program compared with a command-and-control alternative.

Abstract

This study quantifies the cost savings from the Acid Rain Program (ARP) compared with a command-and-control alternative and also examines the impact of trading under the ARP on health damages. To quantify cost savings, we compare compliance costs for non-NSPS (New Source Performance Standards) coal-fired electricity generating units (EGUs) under the ARP with compliance costs under a uniform performance standard that achieves the same aggregate emissions. We do this for the year 2002, the third year of Phase II of the program. We find annual cost savings of approximately $240 million (1995$). To examine the health effects of trading, we compute the health damages associated with observed sulfur dioxide (SO2) emissions from all units regulated under the ARP in 2002—approximately 10.2 million tons—and compare them with damages from a No-Trade counterfactual in which each unit emits SO2 at a rate equal to its allocation of permits for the year 2002, plus any drawdown of its allowance bank. Damages under the ARP are $2.4 billion (2000$) higher than under the No-Trade scenario. This reflects the transfer of allowances from EGUs west of the Mississippi River to units in the eastern United States with higher exposed populations.