From Richard Woodward posting on ResEcon:
"Some of you may have noticed in the news today mention of new regulations by the USEPA on SO2 and NOx emissions. The title of the articles could have been, "The SO2 trading program is dead. Long live the SO2 trading programs!"
Since many of us use the SO2 program as the epitome of what a trading program should look like and teach about it in our classes, I thought you might be interested in a quick overview of what led up to yesterday´s announcement and what it means for trading in the future. I am not an expert in this area, but have been watching these developments for some time.
Quick background:
2004. EPA determines that 28 states and DC contributed significantly to non-attainment in downwind states. This violates the Clean Air Act.
2005. EPA issues the Clean Air Interstate Rule (CAIR) with regional caps and a reduced aggregate cap. Trading continued under these rules.
2008. CAIR was challenged on a number of grounds (North Carolina v. EPA). Judge rules it does not comply with the Clean Air Act, which "requires states to limit emissions from sources that "contribute significantly" to non-attainment ... in downwind states."
July 2010. EPA issues the Transport Rule, a temporary fix to the problem. Trading of SO2 allowances appears to have stopped in May 2010.
July 7, 2011. EPA announces the final Cross-State Air Pollution Rule (CSAPR). From what I've read, CSAPR might be challenged, further delaying implementation of future trading. But if it goes ahead as planned, here's what we'll see.
CSAPR sets up four trading programs in place of the national SO2 trading program and the regional NOx programs. There are limits on the trading so that aggregate emissions from each state are capped, but I'm not entirely sure how this is ensured within the trading system.
Needless to say, there are a wide range of economic issues that deserve further analysis; I'm sure that the program will yield plenty of papers and dissertations. One aspect that I find interesting is that there is no phase in to this regulation -- SO2 allowances held by firms are retired without compensation.
You can access the complete document at EPA's web site."
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