State policy effects on sulfur dioxide emission allowance trading

Title IV of the 1990 Clean Air Act Amendments established a market-based incentive approach to pollution control through the use of tradable allowances for sulfur dioxide (SO₂) emissions by electric utilities. Many researchers have theorized that this approach will be compromised by state regulatory policies that create incentives for utilities to invest in costly pollution control equipment, inhibiting the formation of a free and competitive allowance market. The pUrpose of this research is to investigate the impact of state regulatory policies on the development of the SO₂ allowance market. More specifically, this research examines whether the geographic distribution of traded SO₂ allowances (as determined by an analysis of EPA Allowance Tracking System data) has been affected by the actions of state regulators. The research also investigates the effect of Title IV on the Virginia coal industry.

Several trends in the allowance market are identified in this study, including the declining price of allowances, over compliance at Phase I units, and the geographic patterns of trading. This research only partially supports earlier predictions that states with regulatory policies biased towards costly capital investments in flue gas desulfurization (scrubber) retrofits would become net allowance sellers in the national market. However, the research finds that these state policies, along with several other factors (including the Phase I Extension program, the tax treatment of allowances, and the risk-averse nature of utilities) have contributed to the slow growth in the allowance market. The research also concludes that Virginia low-sulfur coal producers are not benefiting from Title IV implementation.