To accomplish the emissions reduction, Congress established a national cap on SO2 emissions from electric utilities and authorized EPA to allocate an annual emissions allowance to each of the affected electricity-generating facilities. The allowance assigned to each utility is based on its historical rate of resource consumption (expressed in units of equivalent million British thermal units of energy contained in the fuel used annually) and entitles the holder to emit a specified amount of SO2 in the year the allowance was issued or in any later year. If the initial allocation does not cover the desired emissions for a given utility, that utility has a variety of options. It can reduce its emissions to the allowable amount internally through the use of technologies to capture emissions before they escape to the atmosphere (for example, scrubbers), the use of renewable or alternative clean technologies, and conservation and pollution prevention (for example, the use

BOX 5-5
Early Trading Programs Implemented in the United States

Emission-Reduction Credit Programs

Emission-reduction credit (ERC) programs implemented in the 1980s were the first emission-trading programs in the United States. These programs generally were organized around measuring and trading of emission rates rather than discrete units of emissions and shared some of four characteristics: (1) offsets, or emission reductions at existing facilities that must be obtained by new facilities in areas that fail to attain NAAQS; typically, the emission reductions at existing sources must be greater (usually by a factor of 1.3:1or more) than the new emissions; (2) bubbles, or average emission rates over several facilities in a region; (3) netting, which applies to expansion within a facility at existing sources; and (4) banking, which refers to intertemporal trading; banked credits are typically lost if a plant shuts down. The first-generation ERC program yielded about $10 billion of savings in capital costs but still yielded far less than the expectations of economists (Tietenberg 1990; Hahn and Hester 1989a,b).

One problem with the ERC program was the relatively high transaction costs associated with trades. State regulators also wavered in their commitment to the program. That undermined the willingness of parties to engage in trading (Liroff 1986). A final failing of the ERC program was that it translated an existing prescriptive program into a trading program without any associated gains for environmental quality. Hence, the program was perceived as solely in the interest of business, resulting in widespread mistrust on the part of environmentalists and some regulators (Hahn and Stavins 1991).

Lead Phase-Out

The phase-out of lead (Pb) in gasoline affected emissions from mobile sources (Nussbaum 1992). It was implemented at refineries, however, and thus



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