Mary Armijos

1.) What was being traded and who was doing the trading? (5pts)
It was a large scale pollutant allowance trading system. Almost 2000 coal-fired power
plants participating in trading and they were allowed to trade allowances across the
country. If one coal-fired power plant wanted to increase their emissions, they could
look for another plant who would reduce their emissions and sell them the allowance
is necessary to stay in compliance

2.) What were some attractive features to the program? (5pts)

It was very successful in reducing emissions. By 2000 emissions were 40% lower than
the 1980 levels.
It had a good monitoring: continuous emissions monitoring system. There was a high
degree of certainty for the regulators and the market participants. Reduction in
emissions was being done for every allowance theat was generated and traded.
It had very low transactions cost. Allocations credits were traded on Chicago Board of
Trade.
3.) What did most economists think of these tradable permits? (5pts)
Stavins (2005) mentioned that the program had exceptionally positive welfare
effects, with estimated benefits being as much as ten times greater than costs
Furthermore, Tesoriero (2010) wrote that this program was considered, by EPA and
other governments, as a standard of how market-based system can control emissions
at reasonable cost.
It was considered a really nice model of trading. Clear places, good control, strong
cap. All of the things an economist would look for he would like to establish a
pollution trading program

4.) Why did the program fail? (5pts)

The market became volatile in terms of the allowances sold, going almost to zero and
then up. From January 2009 prices dropped substantially and then basically vanished
and there have not been seen trading since april 2010.
In 2004 EPA ruled that the Disctrict of Columbia and 28 other states were contributing
to non-attainment in downwind states. Emissions from those states were causing
other states, neighboring states to come out of compliance with the Clean Air Act. In
2005 EPA responded by establishing what they called The Clean Air Interstate Rule ,
which established regional caps and reduce the aggregate cap. Market responded with
an increase in prices. They also rose as a result of Hurricane Katrina. By 2006 sources
began to install controls, putting more scrubbers on their plants and prices fell
dramatically. In 2008 CAIR didnt do the job, they didnt comply with the Clean Air
Act (which required states to limit emissions from sources that contribute
significantly to nonattainment in downwind states). In 2010 EPA established the
transport rule, it was a preliminary ruling of how they were going to deal with the

Mary Armijos
problem (state by state emissions budhets and very limited interstate trading).
When this rule was established there had been no trades since may 2010
5.) What are some potential problems with pollution trading? (5pts)
If one polluter increases its load, there must be an equivalent reduction by somebody
else and that reduction should leave the air quality impacts on the region unchanged.
But that doesnt really happen. With trading, in the maps there is seen an increase in
the loading relative to without trading. Trading can lead to disparate environmental
impacts and since environmental impacts across state are basically not allowed,
thats going to put them on risk of violating the Clean Air Act.
The pre-implementation analysis seems to ignore the effects of trading on ozone
levels.
6.) What can be learned from the SO2 trading program? (5pts)
That pollution problems are not as easy as the textbook model, as theres spatial
heterogeneity and there are interactions with other pollutants and pollution
problems. And those physical and legal realities cannot be ignored forever.
7.) How might the new SO2 trading schemes be better? (5pts)
The new SO2 trading schemes should consider the spatial heterogeneity and therefore
cap on emissions at state level. Also consider the interaction with other pollutants
and pollution problems by setting up 4 trading programs: SO2 in states where more
reductions are needed, S02 in states needing less reduction, annual NOx emissions
and seasonal NOx emissions.