Environmental participation in the U.S. sulfur allowance auctions

The 1990 Clean Air Act established a sulfur emissions-trading program among utilities. This was the first large scale adoption of this type of emissions-trading program and the program’s success has attracted international attention. An interesting aspect of this program is that in addition to trades among the polluting firms and brokers or investors, individuals and groups have been participants, buying allowances to retire them and reduce sulfur emissions. This provides a relatively unique way to examine the “willingness to pay” for further reductions of sulfur emissions. I examine environmental participation in the sulfur allowances market, focusing on the Environmental Protection Agency (EPA) allowance auctions which have been conducted annually since 1993. The existence of groups purchasing these allowances in order to retire them suggests that the overall cap on sulfur emissions may be higher than the optimal emissions level. The marginal benefits from the first ton of emissions reduction appear to be significantly larger than marginal abatement costs. Total spending to retire sulfur emissions allowances, while small in relation to the total market, is sizeable in terms of the alternate purchases these groups and individuals could have made.