The Park Place Economist


The exponential increase of emissions linked to industrialization released into the air has been a developing concern. Since the early 1960s the United States and other countries have begun recognizing the impacts of acid precipitation, a result of emitted sulfur dioxide reacting with water molecules in the atmosphere to produce harmful acid. Many researchers, climate policy makers, and government officials actively tried to mitigate the origins and effects of acid precipitation, but little was accomplished the U.S. Congress passed and President Carter signed the Acid Precipitation Act of 1980. This piece of legislation allocated resources from the United States Government to allow a 10 year assessment of the causes and consequences of acid precipitation with hopes of developing options for reducing known effects. Although this was a meaningful step forward, few reform proposals have successfully negotiated the trepid path from theory to implementation. A successful program must be realistic. The most conceivable idea of climate reform is not about how to stop the output of SO2, but about how to control it. The SO2 allowance market, one of the most successful climate policy instruments, was put into action in 1995. By providing economic incentives to firms with lower emissions, it effectively limited the amount of harmful sulfur dioxide that was emitted into the atmosphere while introducing fully marketable commodities—allowances—into the market. This paper focuses the factors that determines the price for these allowances and discharge permits and assesses the economic impacts of this incentive program.