Thursday, October 21, 2010

Is the Acid Rain (SO2 Trading) Program Dead?

Over at Environmental Economics (here), Tim Haab (Ohio State) reports on a conference presentation by Texas A&M economist Richard Woodward on "The End of the SO2 Trading Program." The slide (see below) from his presentation on trading volume and spot market prices certainly seems to indicate that SO2 trading is dead. (To enlarge the slide, click on it.)

But it's not clear to me just why the market has collapsed. For one thing, the Clean Air Interstate Rule (CAIR) was not legally related to the acid rain program, so why should the outcome of litigation over CAIR dramatically affect the SO2 market. Moreover, the slide indicates that SO2 allowance prices (the top graph) and trading volumes (the bottom graph) were increasing before CAIR took effect, and started to decline well before CAIR was judicially invalidated. So, there must be more to the story. Specifically, I wonder whether EPA failed to alter the caps enough to maintain sufficient scarcity of SO2 allowances for the market to function.

I am trying to track down more information on what seems to me a very important story.

Hat tip: Tim Haab at Environmental Economics.

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