Benefits and Costs from Sulfur Dioxide Trading: A Distributional Analysis

Policy-makers and others interested in environmental justice (EJ) are concerned that poor and minority communities are disproportionately exposed to pollution. Title IV of the 1990 Clean Air Act Amendments required the dirtiest coal-fired utilities to cap their SO2 emissions at 5.8 million tons per year starting in 1995. At the same time, there was a major regulatory regime change with respect to the regulation of coal-fired utilities, shifting from command-and-control emission standards to a system of tradable allowances. In this paper, we examine the distribution of costs and health benefits across different regions and socioeconomic groups associated with the air quality improvements mandated under Title IV. We examine data on the 148 coal-fired utilities which were regulated under Title IV and find as expected that the monetary benefits of reduced SO2 emissions under Title IV greatly outweigh the costs: we estimate benefits of nearly $56 billion and costs of just $558 million. Not unexpectedly the net benefits are positive in every EPA region, but are highly concentrated. We find that nearly 90% of the benefits and costs of the overall reductions under Title IV are concentrated in 4 regions – the northeast, north central, mid-Atlantic, and southeast. Furthermore, when we examine the socio-economic distribution of net benefits, we find that the poor received slightly lower benefits on average from Title IV, which could raise some EJ concerns, if the poor purchase as much electricity as the rich. On the other hand, the African-American and Hispanic communities received a disproportionately larger share of the benefits relative to their costs. Hence our study indicates that there are no significant EJ concerns raised by Title IV.