The effects of regulatory uncertainty on the U.S. Acid Rain Program

Title IV of the Clean Air Act Amendments of 1990 (CAAA 1990) created the first large scale cap-and-trade program as a means to control acid rain in the United States. The program regulated the emission of sulfur dioxide (SO2) and nitrous oxide (NOx) in the atmosphere—the precursor to acid rain (formerly acid deposition). Economists have long argued for the use of market-based incentive approach as oppose to the traditional command-and-control methods for its ability to be efficient and cost-effective. Title IV went into full effect in 1995 and has been lauded among one of the most successful regulation as it was efficient in reducing SO2 at lower cost than other program. Market based or incentive based programs work by providing incentives for individuals and firms to alter polluting behavirors. This is accomplished by inposing opportunity cost through pricing. The altering of polluting bvehaviors is achieved by changes in the regulatory environment in which firms operate. However, when prices are low there is the potential for the loss of incentive. Such loss in the regulatory environment occurred in 2008 when the D.C. Circuit overturned the Clean Air Interstate Rule (CAIR) and remanded the dispute to EPA to develop new rules for its replacement. This thesis found regulatory uncertainty to contribute significantly to the decline in the price of emission permits. However, the contribution is relatively small. The adoption of technology appears to be the driving factor behind the decline in the price of emission permits. In the context of the Clean Air Act, there was the expectation of more stringent SO2 standards and impending regulation of mercury emissions. Scrubber technology used to control the emission of SO2 has also shown to be effective in limiting the emissions of oxidized mercury. Since the announcement of these standards there has been a statistically significant increase in the number of control technologies being implemented