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674 PART • Information, Market Failure, and the Role of Government potential gain from a broad-based emissions trading program In one study, the cost of achieving an 85-percent reduction in hydrocarbon emissions in all U.S DuPont plants was estimated under three alternative policies: (1) each source at each plant must reduce emissions by 85 percent; (2) each plant must reduce its overall emissions by 85 percent with only internal trading possible; and (3) total emissions at all plants must be reduced by 85 percent, with both internal and external trading possible When no trading was allowed, the cost of emissions reduction was $105.7 million Internal trading reduced the cost to $42.6 million Allowing for both external and internal trading reduced the cost even further, to $14.6 million Clearly, the potential cost savings from an effective tradeable emissions program can be substantial This may explain why Congress focused on transferable permits as a way of dealing with “acid rain” in the 1990 Clean Air Act Acid rain can be extremely harmful to people, animals, vegetation, and buildings The government initially authorized a permit system to reduce annual sulfur dioxide emissions by 10 million tons and nitrogen oxide emissions by 2.5 million tons by the year 2000 That program remains in place today Under the plan, each tradeable permit allows a maximum of one ton of sulfur dioxide to be released into the air Electric utilities and other polluting entities are allocated permits in proportion to their current level of emissions Companies can make the capital investments necessary to reduce emissions, perhaps by selling excess permits, or they can buy permits and avoid having to make costly emissionsreducing investments In the early 1990s, economists expected these permits to trade for around $300 In fact, as Figure 18.8 shows, between 1993 and 2003, prices fluctuated between $100 and $200 Why? It 1600 1400 Price (dollars/ton) 1200 1000 800 600 400 200 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Year F IGURE 18.8 PRICE OF TRADEABLE EMISSIONS PERMITS The price of tradeable permits for sulfur dioxide emissions fluctuated between $100 and $200 from 1993 to 2003, but then increased sharply in 2005 and 2006 in response to an increased demand for permits The price fluctuated between $400 and $500 per ton for the next few years, before the market crashed in 2008, after the EPA was forced to revise the permit program M T Maloney and Bruce Yandle, “Bubbles and Efficiency: Cleaner Air at Lower Cost,” Regulation (May/June 1980): 49–52
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