20 years ago, bipartisan effort in Washington created possibly the most ambitious environmental program in US history - a trading market for sulfur dioxide emissions, intended to end the threat of acid rain. The program was astonishingly successful, achieving benefits that far exceeded its costs. But it is now moribund, without a functioning market. A recent short paper by Rob Stavins and Richard Schmalensee summarizes the story, driven by four "striking ironies".
It's worth a read - the story has deep policy lessons, largely driven (shock) by unintended consequences.
One of these ironies is political - the same Republican party that pushed for a market-based program over initial Democratic opposition now opposes cap-and-trade as a policy tool. This story has been told elsewhere (though it does bear repeating).
The other three ironies Stavins and Schmalensee point out are more interesting. First, the vast majority of the measured benefits the program created by cutting SO2 emissions come from associated decrease in fine particulate emissions associated with respiratory disease - not acid rain. The harms associated with particulates are still driving air regulation today. In other words, "the government did the right thing for the wrong reason". That might overstate things slightly since particulate harms were understood in scientific circles by 1990, but it is true that the peer-reviewed literature was just emerging and the benefits were not a major source of program's political momentum.
Second, the lower-than-expected cost of complying with the program was mostly a result of totally unrelated government action - deregulation of railroads that made it cost-effective to ship low-sulfur coal from the Powder River Basin in Wyoming to eastern coal plants. In fact, since PRB coal is cheaper in many situations anyway, this policy change would probably have resulted in substantial environmental benefits even if there had been no effort to control SO2 at all - though it is true that cap-and-trade made it possible to access these benefits while traditional command/control regulation would not have.
Finally, despite the success of the program, more recent EPA regulation aimed at further reducing SO2 emissions has effectively destroyed it. Market prices of SO2 allowances have been near zero since EPA introduced its Cross-State Air Pollution Rule in 2010, largely since that rule would have ended interstate trading. That rule was recently overturned by the DC Circuit, but interstate trading (and therefore a viable SO2 allowance market) are very unlikely to come back without new legislation.
Drawing any lessons at all from this experience is hard. On the one hand, the canonical lesson of the SO2 program is valid - market-based environmental tools work. The market allowed emitters to take advantage of the opportunity offered by deregulated railroads, and probably spurred innovation in emissions-cutting technologies. If you're going to regulate an environmental risk, therefore, the SO2 program is a powerful example of why you should do so by pricing it.
But at the same time the SO2 experience suggests we should be careful about regulating at all. As always, unintended consequences will be large, perhaps far larger than intended ones. Compared to particulate emissions, acid rain is both not that big of a deal and harder to do anything about. But that was not widely understood in 1990, and particulate emissions reduction is far and away the number one reason benefits of the program are so high. And, as noted, unrelated government deregulation is a key prerequisite for the single largest source of cost savings.
Maybe someone anticipated all this in 1990, but Congress surely did not. If PM hazards had not emerged and railroads not been deregulated, the program (and with it cap-and-trade itself) would not have been viewed as such a clear success - my guess is that whether costs exceeded benefits would remain a topic of controversy among economists.
One consolation is that the SO2 experience may help economists and policymakers make better predictions of costs and benefits in the future - maybe we just weren't very good at this in 1990. But each new problem is different. It's much harder to estimate the costs and benefits of carbon emissions reduction since it's role in the economy is far greater and the effects of climate change are so complex.
This doesn't mean government should never regulate – as always, we have to make decisions based on the information we have. Government should still regulate environmental risks when the cost-benefit case for doing so is clear. But the SO2 experience is yet another reminder that whatever predictions you make about regulation in advance, they will be wrong.
What about the third irony - that EPA killed its own best environmental program? Look for more on that from Dallas Burtraw soon.
