Abstract
Since 1970, transportation, power generation, and manufacturing have dramatically transformed as air pollutant emissions fell significantly. To evaluate the causal impacts of the Clean Air Act on these changes, we synthesize and review retrospective analyses of air quality regulations. The geographic heterogeneity in regulatory stringency common to many regulations has important implications for emissions, public health, compliance costs, and employment. Cap-and-trade programs have delivered greater emission reductions at lower cost than conventional regulatory mandates, but policy practice has fallen short of the cost-effective ideal. Implementing regulations in imperfectly competitive markets have also influenced the Clean Air Act’s benefits and costs.
- Spatially varying regulations can impose substantial costs on local economies.
- Current applications of market-based mechanisms may fall short of cost-saving expectations.
- Varying fuel content regulations across the United States may impose unnecessary costs on consumers in separated markets.
- Regulatory flexibility for fuel content rules doesn’t always yield cost-effective results.
- Unanticipated costs arising from overly optimistic technology projections are an important issue in the design of renewable fuel requirements.
The SO2 program has been subject to extensive research, with a number of papers
focusing on the early years (such as Carlson et al. 2000 and Ellerman et al. 2000) and
some recent synthesis and review papers which combine ex-ante and ex-post papers
(such as Schmalensee and Stavins 2013). The ex-ante analyses all suggest large cost
savings based on a comparison of the least cost solution of achieving the cap to the
command-and-control uniform performance standard case. Carlson et al. (2000)
note that this cost reduction reflected dramatic declines in their estimated marginal
abatement cost functions for sulfur dioxide emissions resulting from changes in
technology and low-sulfur coal prices over 1985-1995.
The only true ex post study of the program’s benefits and costs is by Chan et al.
(2018), which finds much smaller cost savings than predicted ex ante. In part, this
is the result of decisions of several power plants—in concert with their state public
utility commissions—to install scrubbers rather than comply by purchasing allowances
and/or using low sulfur coal, a decision that Chan et al. estimate increased annual
compliance costs by nearly $100 million. Focusing on 2002 as a Phase II year before
the transition to a period of regulatory uncertainty and using a mixed logit model
of the firm’s compliance decision, the authors find that the SO2 program reduced
compliance costs by about $200 million (1995$) and increased public health benefits
by roughly $170 million. Chan et al. examine a performance standard that delivers the
same aggregate emission outcome as the Acid Rain Program in 2002, which had much
higher emissions than the cap due to use of banked allowances. Thus, the cost-savings
of the two instruments may be smaller than they would have been under the statutory
cap for 2002. Chan et al. also find that the prevailing pattern of allowance trading—
from western generating units in sparsely populated areas to eastern generating units
in more densely populated areas—increases public health damages by about $2 billion
relative to a no-trade counterfactual.
...
The Chan et al. paper builds on the insights in Muller and Mendelsohn (2009), which illustrated through an integrated assessment model how the location of an emission source relative to a downwind population could dramatically affect the monetized damages of a ton of sulfur dioxide emitted at that source. In their counterfactual analyses, Muller and Mendelsohn estimated that trading ratios, based on the relative damages associated with a ton of emissions for a pair of locations, could improve social welfare by nearly $1 billion per year compared to the ton-for-ton trading in the SO2 program as implemented. However, such differentiation in cap-and-trade implementation raises questions about administrative feasibility and accuracy in estimating ratios, especially in the presence of a complicated atmospheric chemistry that could induce negative ratios for NOx (Fraas and Lutter 2012).
...
While overall coal prices fell during the latter half of the 1990’s, Busse and Keohane found that delivered prices rose for plants covered by Phase I of the SO2 cap-and-trade program relative to those still operating under command-and-control regulation, and prices rose more at plants near a low-sulfur coal source. Overall, they estimate that railroads enjoyed an increase in annual producer surplus of more than $40 million, which represented about 15 percent of the economic surplus created by the cap-andtrade program....
