Introduction
Programs aimed at protecting the environment always cause public outcry and become an occasion for discussion since the topic of pollution is relevant and important. One of such programs, which is connected not only with the prevention of contamination consequences but also the peculiarities of the market, is the SO2 market trading program. This project, which was developed at the end of the twentieth century, has become one of the innovations in the policy of combating harmful emissions into the atmosphere. Its provisions have certain outcomes from both environmental and economic points of view. The program under consideration has a number of features, and its conditions have a significant impact on the market situation.
Description of the Program
The SO2 market trading program under the Clean Air Act amendments is a special project that deals with protecting the environment from harmful emissions. However, this program also touches the market since some economic issues are involved. In particular, according to Burtraw, its conditions imply permitting electric generating ventures to trade allowance for emissions of harmful gases into the atmosphere (79). This measure was adopted after an appropriate law on air protection had been changed, and a new course became an occasion for regulating the monetary relations among participants in the industrial market.
The Clean Air Act was to allow the facility to be transferred from the main source of pollution to the local source when it managed to reduce emissions. Such ventures are subject to less stringent pollution control standards. The measure would increase the flow of investment in projects and technologies to reduce air pollution. In addition to trading that became available to firms-producers, they were able to determine the mode of operation of their enterprises independently in accordance with the new conditions in the legislation. However, in order to obtain a permit for this right, the assessment of the productivity and emissions volume was necessary so that competent authorities could verify the rational use of possible resources.
The purpose of this program is to change the order of work of enterprises in accordance with the new legislation and regulate the volume of waste entering the atmosphere. At the same time, manufacturers received an obligation to control the number of emissions to the atmosphere since global air pollution leads to an unfavorable ecological situation. After specific changes to the legislation adopted in the 1990s, various similar projects appeared, for example, the Acid Rain Program (ARP) aimed at eliminating the effects of chemical pollution (“Acid Rain Program”). According to the official information, this program “was the first national cap and trade program in the country, and it introduced a system of allowance trading that uses market-based incentives to reduce pollution” (“Acid Rain Program”). It means that the project was the first to maintain the system of trade between enterprises and state boards. Further innovations in the legislation were based on the principle applied in the ARP. The peculiarity of the SO2 market trading program is that economic issues are affected along with environmental ones, which increases the chances for the project’s successful realization.
Economic Theory
The program under consideration is directly related to the financial market. According to Keohane and Olmstead, market-based policies “are appealing from an economic perspective, because they directly address the market failure at the root of environmental problems” (139). Market failure, in this case, lies in the fact that companies falling within the scope of the Act’s terms cannot count on any help and freely change the mode of operation due to funds allocated from the budget. Competitiveness increases since companies that have environmentally friendly production are able to sell their products successfully and make a profit. Potentially dangerous enterprises, on the contrary, faced obstacles caused by the new legislation, and they had to look for funds to change the mode of operation. Therefore, pollution has a negative impact on the financial side of the issue. The inability to eliminate the consequences of hazardous contamination timely led to the fact that a new course was created to prevent contamination caused by industrial activities. An economic theory involved in this project implies the allocation of funds to fight a specific problem and the imposition of a corresponding fine in case of exceeding the limit.
Keohane and Olmstead also argue that if this or that enterprise is liable for its pollution, the state has the right to require its representatives to reduce emissions or install appropriate purification equipment (142). However, these funds will not be allocated from the budget, and “the assignment of property rights will affect how much pollution control is done, not just who pays for it” (Keohane and Olmstead 142). Such an economic approach is envisaged in the program under consideration.
Bringing up property rights is one of the nuances of the program’s terms. According to this point, producers independently regulate and, if necessary, reduce the number of emissions in their enterprises. Nevertheless, this provision does not mean that control by the state will be canceled. Of particular importance is precisely the way to eliminate the negative effects of pollution but not the measures through which this work is conducted. Therefore, the freedom that is received by industrial ventures is relatively conditional in connection with continuous monitoring by the responsible bodies.
It is supposed that the project should solve those tasks that the market has not been able to deal with before, namely, to control the work of manufacturers and regulate the degree of emissions that are released into the atmosphere. The new legislation is designed to help the authorities to monitor the activity of industrial enterprises and respond promptly to any irregularities in their work. The funds coming from payers form a significant budget and also benefit the state.
Economic Mechanisms
The implementation of the program had an impact on all market participants. According to Schmalensee and Stavins, many energy companies began to order coal from the East since this raw material contains less sulfur (115). Consequently, the amount of money spent on resources increased. Also, the fines system provides for the obligation to pay the penalty for non-compliance with the terms of the Act. In case of excess emissions, payments should be made, which allows the state to earn money but forces industrial companies to spend additional funds.
When evaluating the consequences of implementation in terms of the supply of industrial production and demand for these goods, some obvious conclusions can be drawn. In the new market conditions, the supply has increased, and demand, on the contrary, has become lower. It, in its turn, largely determines the nature of payments. As Keohane and Olmstead claim, if the supply curve slopes upward and the demand curve slopes downward, “both sides of the market (producers and consumers) will share the burden of the tax” (150). Certainly, the price for consumers will not increase to the full value of the fine. Nevertheless, it will grow, and for suppliers, the situation will be the opposite – the cost will fall. All these conventions predetermine the course of activities. Enterprises need to monitor the quality of work and control the number of emissions, and producers of raw materials need to establish partnerships in order to make a profit. The situation for consumers does not change significantly. Nevertheless, the introduction of fine charges may adversely affect the degree of the population’s satisfaction with the new legislation because no one is likely to express the desire to pay his or her own money for helping businesses.
Pros and Cons
In the market economy, the goals of minimizing environmental costs are achieved through the implementation of pollution prevention principles and the independent payment by a manufacturer of the struggle against contamination. In terms of economic aspects, the SO2 market trading program is effective in the context of environmental protection. However, as Schmalensee and Stavins note, “the actual benefits turned out to be substantially greater than originally expected but not because of ecological benefits” (117). According to the authors, the reduction of harmful emissions into the atmosphere positively affects the indicators of human health (Schmalensee and Stavins 117). This factor proves that the program was accepted, not in vain.
The project under consideration can encourage innovations since the obligation to reduce the number of harmful emissions requires the search for new methods of filtration. If manufacturers actively work to attract new and effective ways to improve the quality of production, it will have a positive impact on both people’s health and the environmental situation. Therefore, the program contributes rather than inhibits innovations.
The distribution of funds and the imposition of fines have a positive impact on the country’s budget. The program includes more cost-effective regulations than straight ones. Producers need to adjust to new conditions and look for new ways to purchase less harmful materials. The probability of negative impact of emissions on people will be significantly reduced if manufacturers follow the terms of the Act. All these features make it possible to talk about the effectiveness of the SO2 market trading program, but some changes can be made in order to achieve the satisfaction of all parties interests.
One of the potential disadvantages of the program is the possibility of pollution hot spots. If harmful materials are gathered in particular places, these sites may soon become dangerous. Therefore, useful measures to avoid this risk should be taken by both producers and authorities.
Evidence
There is some evidence that the program under consideration works, and its provisions have an impact on preventing a large number of emissions. According to Keohane and Olmstead, “reducing pollution is less expensive than paying for permits” (p. 178). In other words, it is advantageous for industrial enterprises to control their activities and adjust them in such a way as to minimize the harmful impact on the atmosphere. If they do not do it, they will have to pay a substantial fine to the state. In the conditions of searching for new resources and establishing partnership relations, this activity is hardly necessary.
After the adoption of the Act, a pollution payment system was introduced built on the principle of optimizing the costs of environmental protection measures. The fee was selected based on the level of the marginal costs of the polluting enterprise to fight contamination. In other words, finding an equilibrium point was introduced into the field of environmental protection. Theoretically, this approach is very effective, but in a practical form, it caused difficulties in implementation. The pollution charges are determined mainly through negotiations or bidding among industrial companies and local environmental authorities. Therefore, manufacturers prefer to avoid the involvement of government agencies in their work, which, in its turn, positively affects the environmental situation.
Despite a number of advantages, there were some problematic innovations. As Burtraw et al. remark, the distribution of assets between electricity producers, the government, and consumers is the process that requires careful analysis and agreement with all parties (557). Some difficulties were caused by the need to change legislation and review the procedure for controlling the activities of industrial ventures. However, as practice shows, the provisions of the program are applied successfully, and some benefits are obvious.
Conclusion
The features of the SO2 market trading program significantly influence not only the state of the environment but also the situation in the market. Those economic mechanisms that are used to implement the project require the participation of all stakeholders, and the distribution of financial assets is strictly in accordance with the new legislation. The program has not only obvious advantages but also some controversial issues. The evidence of the success of the project’s implementation can be traced to public health improvement, which is one of the primary objectives pursued by the government.
Works Cited
“Acid Rain Program.”United States Environmental Protection Agency, Web.
Burtraw, Dallas. “The SO2 Emissions Trading Program: Cost Savings Without Allowance Trades.” Contemporary Economic Policy, vol. 14, no. 2, 1996, pp. 79-94.
Burtraw, Dallas, et al. “The Costs and Consequences of Clean Air Act Regulation of CO2 from Power Plants.” American Economic Review, vol. 104, no. 5, 2014, pp. 557-562.
Keohane, Nathaniel O., and Sheila M. Olmstead. Markets and the Environment. 2nd ed., Island Press, 2016.
Schmalensee, Richard, and Robert N. Stavins. “The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment.” Journal of Economic Perspectives, vol. 27, no. 1, 2013, pp. 103-122.