Lecture 13 The Acid Rain Program

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Lecture 13The Acid Rain Program

• AEDE/NR 531
• Spring Quarter, 2006

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Air A Public Good

• In the last 50 years, it became clear that
  electricity plants produced sulfur dioxide which
  resulted in acid rain.
• Acid rain caused consideration environmental
  damage to areas downwind from these plants, often
  hundreds or thousands of miles away.
• It was a difficult problem to address because
  clean air is a public good.
• Even if property rights over the air were given
  to the electricity company or to those living in
  affected areas, bargaining likely would not have
  taken place because of the public good problem.

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Acid Rain

• 70 of all fossil fuel combustion in the U.S. is
  for electricity production.
• To circumvent the public good problem, government
  intervention is a likely option.
• Options The government could have restricted all
  power plants to a set sulfur emission level.
  This would have ignored the fact that some plants
  could have reduced sulfur emissions at lower cost
  than others.
• Why do different plants have different abatement
  cost curves?

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Acid Rain Program Goals

• Reduce sulfur emissions by 10 million tons below
  1980 levels.
• Used a two-phased tightening of restrictions
  schedule.
• Phase I
• Phase II

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Acid Rain Program

• Is often called a Cap and Trade program.
• Utilities were allocated allowances based on
  their historic fuel consumption and specific
  emission rate. Units built after 1996 are not
  allocated allowances.
• An allowance allows a utility to produce 1 ton of
  SO2 during a year.
• For each ton of SO2 produced, an allowance is
  retired for that year.
• Allowances can be bought, sold, or banked. Phase
  II capped total allowances at 8.95 million.
• Anyone can participate in the market.

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When to Use a Trading Based Policy

• Some environmental problems are more difficult to
  address through an incentive based trading
  program.
• Characteristics that make an environmental
  problem attractive for a trading based incentive
  program

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How Can Utilities Meet Allowances
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Fuel Sources for Electricity Production
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Allowance Auctions

• Allowance auction for a small portion (2.8) of
  the total set of allowances is held annually.
  They help send the market a signal of the price
  of an allowance.
• Auctions were run by the Chicago Board of Trade.
• Sealed bid auction were bidders send sealed offer
  in.
• Allowances are then sold starting with the
  highest bids until no allowances remain.

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Allowance Auction 2006

• 125,000 allowances supplied by the EPA.
• Winning bidders included Morgan Stanley, JP
  Morgan, Grey K Environmental, Suez Energy
  Marketing, Acid Rain Retirement Fund, Clean Air
  Conservancy Charitable Trust, among others.
• Highest bid 1700
• Clearing bid (lowest bid that was awarded
  allowances) 860.07.
• Lowest bid 650

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Allowance Auctions
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Allowance Trading
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Allowance Trading
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Allowance Trading
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Allowance Trading

• Why has the price of allowance permits gone up
  recently?

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Compliance and Enforcement

• EPA runs the Allowance Tracking System.
• EPA is notified by allow units of transferring
  allowances from one unit to another.
• Continuous Emissions Monitoring System is used
  that employs electronic sensor systems in smoke
  stacks in all units.
• If a unit emits more than its allowance, it must
  pay 2525 per excess ton of sulfur dioxide. It
  must also surrender allowances for the following
  year to EPA as excess emissions offsets.

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Results

• Despite a 20 increase in utilization, SO2
  emissions decreased 13 from 1995 to 2004.
• General Accounting Office estimates that as much
  as 3 Billion per year is saved using the Acid
  Rain Training Program compared to a Command and
  Control approach.
• When accounting for prevented damage to the
  environment and human health, estimated annual
  benefits of the sulfur trading program in 2010
  are 122 Billion.

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Results
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Results
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Summary Document

• http//www.epa.gov/airmarkets/cmprpt/arp04/2004rep
  ort.pdf