Sulfur Dioxide Emissions and Market Effects under the Clean Air Act Acid Rain Program

The Clean Air Act Amendments of 1990 (CAAA90) established a national program to control sulfur dioxide (SO₂) emissions from electricity generation. CAAA90's market-based approach includes trading and banking of Soumissions allowances. We analyzed data describing electric utility SO₂ emissions in 1995, the first year of the program's Phase I, and market effects over the 1990-1995 period. Fuel switching and flue-gas desulfurization were the dominant means used in 1995 by targeted generators to reduce emissions to 51% of 1990 levels. Flue-gas desulfur-ization costs, emissions allowance prices, low-sulfur coal prices, and average sulfur contents of coals shipped to electric utilities declined over the 1990-1995 period. Projections indicate that 13-15 million allowances will have been banked during the program's Phase I, which ends in 1999, a quantity expected to last through the first decade of the program's stricter Phase II controls. In 1995, both allowance prices and SO₂ emissions were below pre-CAAA90 expectations. The reduction of SO₂ emissions beyond pre-CAAA90 expectations, combined with lower-than-expected allowance prices and declining compliance costs, can be viewed as a success for market-based environmental controls.