Journal of Economic Perspectives: Vol. 27 No. 1 (Winter 2013)


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The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment

Article Citation

Schmalensee, Richard, and Robert N. Stavins. 2013. "The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment." Journal of Economic Perspectives, 27(1): 103-22.

DOI: 10.1257/jep.27.1.103


Two decades have passed since the Clean Air Act Amendments of 1990 launched a grand experiment in market-based environmental policy: the SO2 cap-and-trade system. That system performed well but created four striking ironies: First, by creating this system to reduce SO2 emissions to curb acid rain, the government did the right thing for the wrong reason. Second, a substantial source of this system's cost-effectiveness was an unanticipated consequence of earlier railroad deregulation. Third, it is ironic that cap-and-trade has come to be demonized by conservative politicians in recent years, as this market-based, cost-effective policy innovation was initially championed and implemented by Republican administrations. Fourth, court decisions and subsequent regulatory responses have led to the collapse of the SO2 market, demonstrating that what the government gives, the government can take away.

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Schmalensee, Richard (MIT)
Stavins, Robert N. (Harvard U and Resources for the Future, Washington, DC)

JEL Classifications

K32: Environmental, Health, and Safety Law
L51: Economics of Regulation
L94: Electric Utilities
Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
Q54: Climate; Natural Disasters; Global Warming
Q58: Environmental Economics: Government Policy


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