In a recently published book, MIT researchers say that emissions trading, a new kind of environmental policy tool, has been "a notable success" in achieving its primary goal -- a 50 percent reduction of sulphur dioxide (SO2) emissions. Nevertheless, they warn against over-selling this approach to environmental problems.
Emissions trading allows companies that face high costs in reducing emissions of certain pollutants -- such as SO2, a precursor to acid rain -- to pay companies with lower-cost opportunities to make the reductions for them. At the international level, it has been discussed as one tool for implementing the Kyoto Protocol, an agreement negotiated in 1997 with the goal of slowing global warming. This month negotiators are meeting to discuss further implementation of the agreement.
Markets for Clean Air: The US Acid Rain Program (Cambridge University Press) is about the first, large-scale use of tradable emissions permits to address an environmental problem. The MIT team found that the program achieved success "on time, without extensive litigation, and at costs lower than predicted." The authors note that these results are largely responsible for transforming emissions trading from being a "pariah among policy makers to being a star."
The research underlying this book was conducted at MIT's Center for Energy and Environmental Policy Research (CEEPR) under the direction of the center's current and former directors, Professors Paul L. Joskow and Richard Schmalensee, respectively, and the Center's executive director, Dr. A. Denny Ellerman. Two recent MIT graduates -- Juan Pablo Montero (SM 1994, SM, PhD) and Elizabeth M. Bailey (PhD 1998) -- complete the research team.
Although the authors conclude that performance to date justifies considering emissions trading as a valuable policy tool, they are quick to caution that this approach will not solve all environmental problems.
On the positive side, they note that the SO2 experience shows that emissions trading can work "more or less as textbooks describe," that the politics of permit allocation did not matter for environmental or economic performance, that permit markets will develop with appropriate program design and implementation, and that these markets can handle surprises sensibly and without sacrificing environmental goals.
On a more cautionary note, they observe that the voluntary aspects of the SO2 trading program did not contribute materially to its environmental or economic goals, and they advise that care be taken in extrapolating from this experience to other environmental problems. As they note, "there is a potentially large distance between embracing emissions trading in principle and producing a detailed program that will perform well in practice."
Dr. Joskow is the Elizabeth and James Killian Professor of Economics. Dr. Schmalensee is dean of MIT's Sloan School of Management and the Gordon Y Billard Professor. The SO2 work was funded by the National Acid Precipitation Assessment Program, the US Environmental Protection Agency and the corporate sponsors of CEEPR.ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
A version of this article appeared in MIT Tech Talk on September 20, 2000.