Permits and the U.S. Acid Rain Program (ARP)

1. Permits and the U.S. Acid Rain Program (ARP)

2. Acid Rain • Caused primarily by SO2 and Nox, which is generated largely by coal fired plants • Harmful to trees, crops, and people (and statues)

3. How we reduced it • Title IV of the 1990 Clean Air Act • The Sulfur Allowance Program • National cap and trade (permits) • Legal allowances which allow owner to pollute a certain amount (1 ton per permit) • Allowances can be bought or sold without restriction anywhere in the US • Program intended to cut sulfur dioxide and nitrous oxide emissions to half of their 1980 levels. Starting in 1995 all powerplant emissions were constantly monitored ($100,000 annual costs/unit). • 100% compliance from utilities

4. Why not command and control? • Simplest to implement – everyone reduces by a set percent or amount (regardless of costs). • People/firms respond to incentives • With proper incentive structure in place, all firms will choose to reduce pollution as long as the costs of abatement (reduction) < costs of polluting. • Firms that find it less costly to reduce, reduce by more. • Firms that find it more costly to reduce, reduce by less. • Can achieve same reduction in pollution at lower cost to society!

5. Why not command and control? • Consider: • 10 small firms, producing 10 tons of emissions, costs of abatement is $500/ton. • 5 large firms, producing 20 tons of emissions, costs of abatement is $1,000/ton. • Efficient level is 100 tons. • Command and control says all firms must reduce by 50%. Total cost is: • Small firms: $500/ton*5 tons*10 firms = $25,000 • Large firms: $1,000/ton*10 tons*5 firms = $50,000 • $75,000 total • What’s a cheaper option?

6. Proof that permits are better • What if small firms reduced to zero? • $500/ton*10 tons*10 firms = $50,000 • Same outcome (reduce by 100 tons) but society saves $25,000 • Unfair to tell all small firms to reduce to zero, allow large firms to pollute. • Can arrive at that outcome without telling any firm what to do through taxes (price restriction) or permits (quantity restriction) • Permits can be bought and sold among polluters. • Those that find it less costly reduce by more – sell permits to those that find it more costly to reduce.

7. How permits work • What if gov’t provides 100 transferable permits to small firms (abatement costs=$500/ton) • Would be willing to sell if they get at least $500 for each permit (Sell Price>abatement costs). • Large firms are willing to buy if costs less than $1,000/permit (Buy Price<abatement costs). • If price = $750 - large firms buy all 100 permits, small firms reduce to zero; exactly what we wanted to happen. • Any transaction with price between $500 and $1,000 is mutually beneficial. • What if all 100 permits given to large firms… • Does not matter how they are initially distributed!

8. Acid Rain Program History • Allowances were given to utilities rather than sold (no way auction could pass Congress). • Allowances could be used or banked for use in future years (or sold to other firms) • Important to have firms invested in the program for it to succeed. • Done in two phases • In the early 1990s, analysts expected prices to be about $250-350/ton in Phase I and $500-$700 in Phase II (generally under that price). • Initial permits went for $63. • Suggests abatement costs were lower than expected (innovation)

9. Price history

10. The effects of banking allowances • 2 million more permits were purchased in 2010 than total emissions. • Some purchased by environmental groups (why?), others by investors (why?). • Most purchased by energy companies. • Can use them or sell them later • Know emissions will be higher later. • If 1,000 permits are sold from American Electric Power to Ohio Valley Electric Corp for $100/permit, what do we know is true?

11. Has it worked? • Yup.

12. SO2 Emissions, 1980 - 2007

13. NOx Emissions

14. Recently… • The price of a permit has been below $1.00 for the past 3 years. Went for as low as $0.17 this year. Why so low?

15. Specifics • http://www.epa.gov/airmarkets/progress/ARP_1.html • http://www.epa.gov/airmarkets/trading/2012/index.html

16. Studies suggest… • Cost savings from trading increased over time. • 13 – 37% of compliance costs by 2005. • Approximately $400 million • Trading resulted in health related benefits nationally of nearly $570 million in 1995 and about $125 million in 2005. • Why?http://ch.lumina.com/uploads/main_images/The%20Effects%20of%20Trading%20and%20Banking%20in%20SO2%20Allowance%20Market.pdf • Electric costs didn’t increase as a result.

17. What about Carbon? • Environmental Economics – SP 2015

18. Air Quality in Ohio/Youngstown • Ohio: • http://wwwapp.epa.ohio.gov/gis/mapportal/ • Youngstown: • http://www.mahoningvalleyair.org/

19. Breathe in fresh air!

20. International situation • Air quality has improved substantially in virtually all developed countries over last 3 decades. • Air quality has gotten much worse in most developing countries (especially India and China): • http://www.youtube.com/watch?v=-1DNjJd2YfA • http://www.huffingtonpost.com/2012/03/02/china-air-quality-standards_n_1315874.html?ref=green