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Policy Options

The recent National Acid Precipitation Assessment Program report, released in 1998, has brought to reality the fears of many who had thought that the 1990 Clean Air Act Amendments were insufficient regarding acid deposition, especially in the Adirondack Mountains of New York.  Although the Environmental Protection Agency shows that levels of sulfur dioxide emissions have been reduced by 23% since 1986, the levels of nitrogen oxides emissions need further attention.  The Clean Air Act itself does not provide the necessary enforcement legislation for pollutant emissions.  However, the Environmental Protection Agency recently developed the Acid Rain Program that is embedded within the 1990 Amendments to the Clean Air Act.  The overall goal of the program is to achieve significant environmental and public health benefits through reductions in the emissions of sulfur dioxides and nitrogen oxides.  Set up as a two-phase program, Phase I began in 1995 and requires emissions reductions of 110 electric utility plants in twenty-one eastern and midwestern states.  Phase II will begin in 2000 and will expand upon Phase I to include more electric utility plants, encompassing significantly larger units of emissions reductions.  Although the framework of the Acid Rain Program takes into consideration cost-effectiveness and efficiency, analysis of the current program will demonstrate that equity between those that are affected by acid rain is skewed.  Therefore, revision to the current program should be made, not only to take into account the negative externalities resulting from the pollution, but also issues of equity as well.  

Currently, several key features of the Acid Rain Program are aimed to improve the ambient air quality.  The most cost-effective of these is the allowance trading system under which electrical utility plants are allocated allowances based on their historic emissions rate.  Benefit-cost analysis provides support for the cost-effectiveness of the system such that the administrative and enforcement costs are relatively low, while benefits are high.  Furthermore, rules of the Acid Rain Program were integrated so as to facilitate active trading of allowances in order to minimize compliance costs, maximize efficiency, and permit strong economic growth.  However, differences in marginal control costs of pollution abatement between northeastern plants and midwestern plants have resulted in a skewed distribution of allowances, with midwestern plants possessing more.  When the pollutants are emitted into the air, upper level winds carry these pollutants eastward until the Adirondacks, resulting in excessive acid deposition in the Adirondack region. 

A policy revision to account for the uneven distribution of acid deposition is limiting the number of permits that midwestern utility plants are allowed purchase.  At the same time, the Federal Government would partially subsidize these plants to comply with emissions regulations by way of other pollution abatement strategies.  Although this policy would increase costs to the government, the distribution of acid deposition would be more equitable throughout the nation.  A similar policy is already in place in California where coastal sources of pollution are not allowed to purchase permits from inland sources that are downwind from Los Angeles.  In order to achieve efficiency, the precise number of permits that midwestern plants would be allowed to purchase needs to be calculated so as to equate marginal control cost and marginal damage of acid deposition to society. 

A different way of addressing the equity of acid deposition is by way of other economic incentive policies such as subsidies for research and development of new pollution-reducing technology, economic support for installation of scrubbers into smokestacks, or various taxing strategies for emissions or pollution abatement.  A subsidy for plants to install scrubbers into their smokestacks would help pay for the usually large one-time fixed cost of installing a scrubber.  Although such a policy would increase the cost to the government, it would, however, contribute to the gypsum market and the economy as a whole.  One factor must be taken into consideration for this specific policy: the supply of gypsum resulting from the scrubbers must be limited so as not to create excess supply of gypsum, which would, in turn, harm the economy.  Therefore, the subsidy must be carefully calculated so as to prevent such an occurrence. 

The NO_x Program that is embedded in the Acid Rain Program does not allow for allowance trading.  Instead, it provides result-oriented legislation that provides plants with the flexibility to use the least costly method of compliance with emissions limitations.  The program is structured to focus on one set of sources that emit nitrogen oxides, coal-fired electric utility boilers.  Although this program is more costly in general and efficiency is more difficult to achieve, there is more equity between the sources and the affected areas. 

A coasion solution to internalize the externalities is not likely in the context of acid deposition.  Property rights are not well defined, if at all, and transaction costs are extremely high.  Furthermore, because acid deposition is not a local pollution issue, it would be difficult to assign damages caused by the acid deposition to any specific sources. 

Ultimately, the backbone of any new legislation should be the Clean Air Act.  The Acid Rain Program sets the precedence for cost-effective and efficient policies to control acid deposition.  The allowance trading system provides a good example of capitalizing on the powers of the marketplace to reduce sulfur dioxide in the most cost-effective manner.  However, equity must also be addressed in this legislation, perhaps at the sacrifice of cost-effectiveness.  Some features of the Acid Rain Program should be aimed to let market incentives to the work to achieve cost-effective emissions reductions while other feature should do the work to achieve a more equitable distribution.  Answers from the conjoint analysis would also help to establish the levels of various attributes needed to determine which policy revision would be most beneficial.