The Effects of Trading and Banking in the SO2 Allowance Market

The 1990 Clean Air Act Amendments initiated a dramatic reduction in emissions of sulfur dioxide and nitrogen oxides by electric power plants. This paper provides an evaluation of the environmental and public health consequences of the trading and banking provisions of Title IV. A sizable shift in the geographic location of emissions under Title IV (in some states of over 20 percent of emissions after Title IV is implemented) is attributable to trading and/or to banking. There has been considerable concern that this shift in emissions would cause harm to downwind areas due to long-range transport of pollution. The authors find the resulting change in atmospheric concentrations and deposition of pollutants, and the change in monetized health benefits, are most unfavorable in the regions where emissions increase. In the East and Northeast including New York State, an area of particular concern, health benefits increase and deposition of sulfur decreases slightly as a result of trading. In the aggregate, trading results in health related benefits nationally of nearly $570 million in 1995 and about $125 million in 2005. The reason is that the geographic shift in emissions away from more populated areas leads to a decrease in exposure to harmful particulates. Meanwhile, cost savings from trading represent about 13 percent of compliance costs in the No Trading scenario in 1995, and about 37 percent in 2005. Banking has the anticipated effect of changing the timing of emissions. Banking causes a reduction of up to 20 percent in 1995 in some states and a commensurate increase in 2005. The geographic pattern of emission changes as a consequence is varied; some states reduce emissions in 2005 as a result of banking. These changes are small compared to the overall reduction in emissions, sulfur deposition, and human health benefits expected to result from the program.