Why are allowance prices so low?: An analysis of the SO2 emissions trading program

This paper presents an analysis of the reduction in SO2 emissions by electric utilities between 1985 and 1993. We find that, as of 1993, emissions had been reduced for reasons largely unrelated to the emission reduction mandate incorporated in Title IV of the 1990 Clean Air Act Amendments. The principal reason appears to be the change in the economics of coal choice that resulted from the remarkable decline in rail rates for low sulfur western coal delivered to higher sulfur coal-fired plants in the Midwest. Consequently, one of the reasons that allowance prices are lower than expected is that less sulfur need be removed to meet the Title IV caps on aggregate SO2 emissions.