The Clean Air Act's sulfur dioxide emissions market: Estimating the costs of regulatory and legislative intervention

Abstract

This paper explores the economic impacts of regulatory and legislative intervention in the Clean Air Act Amendment's sulfur dioxide (SO2) allowance trading market. This intervention is of two types: (1) direct intervention through laws or regulatory orders that constrain compliance options of market participants, and (2) indirect intervention, reflected in utility decision making, and caused by a lack of regulatory policies that clarify the treatment of allowance market transactions. The paper uses a dynamic, linear programming model to empirically estimate the economic impacts of this intervention. An example of direct intervention is explored by modeling actual legislative and/or regulatory proposals in New York and Wisconsin; indirect intervention is explored through the development of a cost-uncertainty tradeoff curve. The results indicate that both types of intervention are costly and these costs must be weighed against any expected social benefits.