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The social cost of trading: Measuring the increased damages from sulfur dioxide trading in the United States

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  • David D. Henry III
  • Nicholas Z. Muller
  • Robert O. Mendelsohn

Abstract

The sulfur dioxide (SO 2 ) cap and trade program established in the 1990 Clean Air Act Amendments is celebrated for reducing abatement costs ($0.7 to $2.1 billion per year) by allowing emissions allowances to be traded. Unfortunately, places with high marginal costs also tend to have high marginal damages. Ton‐for‐ton trading reduces emissions in low damage areas (rural) while increasing emissions in high damage areas (cities). From 2000 to 2007, conservative estimates of the value of mortality risk suggest that trades increased damages from $0.8 to $1.1 billion annually relative to the initial allowance allocation and from $1.5 to $1.9 billion annually relative to a uniform performance standard. With U.S. Environmental Protection Agency (USEPA) values, trades increased damages from $2.4 to $3.2 billion annually compared to the initial allowance allocation and from $4.4 to $5.4 billion compared to a uniform performance standard. It is not clear that the ton‐for‐ton SO 2 cap and trade program is actually more efficient than comparable command and control programs. The trading program needs to be modified so that tons are weighted by their marginal damage. © 2011 by the Association for Public Policy Analysis and Management.

Suggested Citation

  • David D. Henry III & Nicholas Z. Muller & Robert O. Mendelsohn, 2011. "The social cost of trading: Measuring the increased damages from sulfur dioxide trading in the United States," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 30(3), pages 598-612, June.
    • Handle: RePEc:wly:jpamgt:v:30:y:2011:i:3:p:598-612
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    Cited by:

    1. LaPlue, Lawrence D., 2022. "Environmental consequences of natural gas wellhead pricing deregulation," Journal of Environmental Economics and Management, Elsevier, vol. 116(C).
    2. Joseph G. Schiavo & Robert Mendelsohn, 2019. "The Effect Of Domestic Air Pollution Mitigation And Fracking On Retirements Of Coal Power Plants," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-21, May.
    3. Alex Hollingsworth & Taylor Jaworski & Carl Kitchens & Ivan J. Rudik, 2022. "Economic Geography and the Efficiency of Environmental Regulation," NBER Working Papers 29845, National Bureau of Economic Research, Inc.
    4. Jaramillo, Paulina & Muller, Nicholas Z., 2016. "Air pollution emissions and damages from energy production in the U.S.: 2002–2011," Energy Policy, Elsevier, vol. 90(C), pages 202-211.
    5. Holland, Stephen P. & Yates, Andrew J., 2015. "Optimal trading ratios for pollution permit markets," Journal of Public Economics, Elsevier, vol. 125(C), pages 16-27.
    6. Chan, H. Ron & Chupp, B. Andrew & Cropper, Maureen & Muller, Nicholas Z., 2015. "The Net Benefits of the Acid Rain Program: What Can We Learn from the Grand Policy Experiment?," RFF Working Paper Series dp-15-25, Resources for the Future.
    7. Blumberg, Joey, 2024. "A Comparative Analysis of Water Allocation Institutions and Economic Efficiency," 2024 Annual Meeting, July 28-30, New Orleans, LA 343557, Agricultural and Applied Economics Association.
    8. Chan, H. Ron & Chupp, B. Andrew & Cropper, Maureen L. & Muller, Nicholas Z., 2018. "The impact of trading on the costs and benefits of the Acid Rain Program," Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 180-209.
    9. Huang, Ching-Hsun & Bagdon, Benjamin A., 2018. "Quantifying environmental and health benefits of using woody biomass for electricity generation in the Southwestern United States," Journal of Forest Economics, Elsevier, vol. 32(C), pages 123-134.
    10. Stephen P. Holland & Erin T. Mansur & Nicholas Z. Muller & Andrew J. Yates, 2015. "Environmental Benefits from Driving Electric Vehicles?," NBER Working Papers 21291, National Bureau of Economic Research, Inc.
    11. Stephen P. Holland & Erin T. Mansur & Nicholas Z. Muller & Andrew J. Yates, 2016. "Are There Environmental Benefits from Driving Electric Vehicles? The Importance of Local Factors," American Economic Review, American Economic Association, vol. 106(12), pages 3700-3729, December.
    12. Andrew L. Goodkind & Jay S. Coggins & Julian D. Marshall, 2014. "A Spatial Model of Air Pollution: The Impact of the Concentration-Response Function," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(4), pages 451-479.
    13. Chan, Nathan W. & Morrow, John W., 2019. "Unintended consequences of cap-and-trade? Evidence from the Regional Greenhouse Gas Initiative," Energy Economics, Elsevier, vol. 80(C), pages 411-422.
    14. Tracy Snoddon, 2016. "Carbon Copies: The Prospects for an Economy-wide Carbon Price in Canada," e-briefs 247, C.D. Howe Institute.

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