Saturday, August 25, 2012

What Happened to the US Sulfur Emissions Market?

An interesting paper from Schmalensee and Stavins on the market for sulfur emissions in the US. This market is often cited as an example of the success of environmental economics and specifically cap and trade and I have used it as that in my teaching in the past. But what has happened more recently? The authors describe it as "ironic". After a period of relative stability often cited as a great success, the price of permits first sky-rocketed and then collapsed:

Essentially, the George W. Bush administration tried to tighten the cap on emissions significantly pushing the price up. In reaction EPA said they'd reconsider starting the collapse in price and then the courts overturned the new regulations. Then a couple of years ago the Obama administration then proposed state based emissions caps and limited interstate trading couple of years ago the market stopped trading entirely.

Schmalensee and Stavins still think that the program was a success if "ironic". I think this shows just how volatile emissions trading programs are and the likelihood of changes being made in response to price spikes that threaten or destroy the program. I think that the volatility of the European Union carbon trading market tells a similar story and increasingly shows that carbon taxes are the way to go. I used to be in favor of emissions trading due to the supposed certainty it would give on emissions reductions but real world experience shows that this could be a case of the perfect being the enemy of the possible.

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