The End of the Acid Rain Program

by Lesley McAllister

July 12, 2011

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!

Does one imagine that owners of those 12 million ARP allowances not allowed to be carried over under the new CAIR will sit idly by and watch thier investments be devalued in this manner? Although the Clean Air Act stated that allowances were not property rights, this issue has never been litigated on Constitutional grounds, and is certainly actionable. In the past, the Supremes have been prone to reasoning that "if it looks like a duck, walks like a duck, and quacks like a duck, it's probably a duck." Emissions allowances do have value (somewhat reduced) and look like property rights to me. Perhaps we will yet see a takings case on this matter?
— Michael Hamilton
We ask for your email address so that we may follow up with you, ask you to clarify your comment in some way, or perhaps alert you to someone else's response. Only the name you supply and your comment will be displayed on the site to the public. Our blog is a forum for the exchange of ideas, and we hope to foster intelligent, interesting and respectful discussion. We do not apply an ideological screen, however, we reserve the right to remove blog posts we deem inappropriate for any reason, but particularly for language that we deem to be in the nature of a personal attack or otherwise offensive. If we remove a comment you've posted, and you want to know why, ask us (info@progressivereform.org) and we will tell you. If you see a post you regard as offensive, please let us know.

Also from Lesley McAllister

Lesley K. McAllister is a Professor of Law at the UC Davis School of Law.

Regulatory Paralysis by Preemption: GMO Food Labeling and Potentially More

McAllister | Mar 02, 2017 | Food, Drug, Product Safety

The Reliability of the Sun and the Wind

McAllister | Apr 17, 2013 | Environmental Policy

Obama on Clean Energy: Actions Speak

McAllister | Nov 02, 2012 | Climate Change

The End of the Acid Rain Program

McAllister | Jul 12, 2011 | Environmental Policy

The Center for Progressive Reform

455 Massachusetts Ave., NW, #150-513
Washington, DC 20001
info@progressivereform.org
202.747.0698

© Center for Progressive Reform, 2015