Econ 439 - Fall 2016 Exam I 3. About the SO2 Allowance Trading System a. How wer

Question

Econ 439 - Fall 2016 Exam I 3. About the SO2 Allowance Trading System a. How were the allowances allocated among the polluters? (Spts) b. The ecological benefits of the program were relatively small. However, there were other unanticipated benefits. What were these benefits? (5pts) The realized costs of the SO2 allowance trading program were substantially less than forecasts made before the implementation. Indicate one major factor that reduced the costs. How did it work? Use a graph to show the effect of this major factor. (10 pts) c.

Explanation / Answer

One of the major air pollution problems of the 1980 was acid rain, due in large parts to large emission of sulphur from power plants. This was a major issue in North America, Europe and Asia. In the united states, annual sulphur emission were in the order of 20 million tons. After a decade political wrangling, the 1990 amended Clean Air Act was signed into law. The Act, called for a reduction of emissions to 10 million tons annually through the use of tradable permits.

Permits called allowances were issued annually to the power plants based on their historic emissions so that the total sum of allowances issued equal 10 million tons.Allowances can be traded among producers. At the end of the year, an allowance has to be surrendered to the EPA for every ton of sulphur emission. Allowances can be banked for future, which occured frequently. Borrowing the permits was not permitted.

Prior to the start of the program, estimates suggested that allowances would sell for $300 or more, yet prices were well under $100 early in the program.

1990 Clean Air Act calls for a 10 million ton per year reduction in emissions of sulphur dioxide from electric power plants.This is to be achieved using a marketable permits system with the permits distributed without charge based on the historic levels of electric generation. Thus this is a regulation without a revenue recycling effect.

An alternative way of achieving the same effect but with revenue recycling would be to auction the permits. It was calculated that the preexisting taxes on labour increases the total cost of the program by 71%. It was further calculated that more than half of that auctioned with the proceeds going to reduces taxes on labor. Another result is that the tax interaction effect(IE) is on the order of $100 per ton of the pollution reduction.

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