Center for Progressive Reform

The End of the Acid Rain Program

by Lesley McAllister

Cross-posted from Environmental Law Prof Blog.

Do you realize that the Cross-State Air Pollution Rule finalized by the Environmental Protection Agency last week represents the end of the famed Acid Rain Program? It's a good thing because the Acid Rain Program had outlived its usefulness by several years and its allowance market had collapsed.

Legislated into existence by the Clean Air Act Amendments of 1990, the Acid Rain Program (ARP) was a major experiment with cap-and-trade regulation. It began in 1995, and its first few years were quite a success. With the ability to bank allowances for future years when they might be quite valuable, the power plants included in the program reduced their pollution by more than they had to. In the first five years of the program, EPA’s annual caps allowed them to emit a total of 38 million tons of sulfur dioxide, but the power plants actually only emitted 26 million tons. So when the program was expanded to include smaller power generators in 2000, the big utilities were sitting pretty with about 12 million ton of allowances in the bank (for a blow-by-blow of overallocation in this and other cap-and-trade programs see my article, The Overallocation Problem In Cap-And-Trade: Moving Toward Stringency, 34 COLUM. J. OF ENVTL. LAW 396 (2009).

But in the end, many of the big power plants probably didn’t make as much money selling their banked allowances as they thought they would. In the early 2000s, there was some demand for allowances because all those smaller generators weren’t allocated quite enough allowances to cover their emissions. A power plant selling in the early 2000s could have made about $150 per allowance. If they were really smart (or lucky), they sold allowances in the mid-2000s. In these years, the Bush Administration was implementing the Clean Air Interstate Rule (CAIR), which allowed the use of ARP allowances and made them more valuable. From 2005 to 2007, allowances traded for an average of more than $600. (For price information see EPA's auction results.)

Then, in July 2008, the DC Circuit struck down CAIR in North Carolina v. EPA, and in November, President Obama was elected. The power plants and other market actors realized that the ARP allowance party was ending, and the value of allowances plummeted. In 2009, allowances sold for $62; in 2010, they sold for $36, and earlier this year, they were selling for $2. Talk about a burst bubble, or a market collapse… that’s what the end of the Acid Rain Program looked like.

In great contrast to CAIR, the new Cross-State Air Pollution Rule does not allow the carryover of ARP allowances. Given that there were still more than twelve million tons-worth of banked allowances in 2009, this is a very good thing for the new rule’s stringency and for the environment. Although the size of the bank had decreased in the early and mid-2000s to about 6 million allowances, it grew again in the late 2000s as the program operated under the outdated and overly-lenient caps that had been set by Congress in 1990.

Kudos to the Obama EPA for putting the Acid Rain Program and its overallocated allowances to rest!