What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading

Over the past twenty-five years, the political process has gradually become more receptive to market-based instruments. By far the most ambitious application of these instruments has been for the control of acid rain under Title IV of the Clean Air Act amendments of 1990, which established a sulfur dioxide (SO2) allowance trading program intended to cut nationwide electric utility emissions by 50 percent by the year 2000. This essay seeks to identify lessons that can be learned from this grand experiment in economically oriented environmental policy. We begin with a very brief description of the SO2 allowance trading system and its performance to date. We examine positive political economy lessons that can be learned from the program's enactment by addressing three questions. Why have conventional, command-and-control instruments been the dominant form of environmental regulation? When market-based approaches have been used, why has the chosen form always been freely distributed (grandfathered) tradeable rights? And why was allowance trading adopted for acid-rain control in 1990? We also consider normative lessons that can be learned from the program's design and performance, organizing these into four categories: lessons for environmental policy; for design and implementation of tradeable permit systems; for analysis of prospective and adopted systems; and for identifying new applications. In a final section, we offer some conclusions.