ECONOMICS OF POLLUTION TRADING FOR SO2 AND NOX

For years economists have urged policy makers to use market-based approaches such as cap-and-trade programs or emission taxes to control pollution. The sulfur dioxide (SO2) allowance market created by Title IV of the 1990 U.S. Clean Air Act Amendments represents the first real test of the wisdom of economists’ advice. Subsequent urban and regional applications of nitrogen oxides (NOx) emission allowance trading took shape in the 1990s in the United States, culminating in a second large experiment in emissions trading in the eastern United States that began in 2003. This review provides an overview of the economic rationale for emissions trading and a description of the major U.S. programs to reduce SO2 and NOx pollution. We evaluate these programs along measures of performance, which include cost savings, environmental integrity, and incentives for technological innovation. We offer lessons for the design of future programs including, most importantly, those to reduce carbon dioxide.