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Faculty Research Working Paper Series
Robert N. Stavins
Albert Pratt Professor of Business and Government
phone: (617)495-1820
The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment
Schmalensee, Richard, and Robert N. Stavins. "The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment." HKS Faculty Research Working Paper Series RWP12-030, August 2012.
Abstract
Two decades have passed since the Clean Air Act Amendments of 1990 launched a grand experiment in market-based environmental policy: the SO2 cap-and-trade system. That system performed well but created four striking ironies. First, by creating this system to reduce SO2 emissions to curb acid rain, the government did the right thing for the wrong reason. Second, a substantial source of this system’s cost-effectiveness was an unanticipated consequence of earlier railroad deregulation. Third, it is ironic that cap-and-trade has come to be demonized by conservative politicians in recent years, since this market-based, cost-effective policy innovation was initially championed and implemented by Republican administrations. Fourth, court decisions and subsequent regulatory responses have led to the collapse of the SO2 market, demonstrating that what the government gives, the government can take away.
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