That is Richard Woodward's title in a remarkable post to the RESECON listserv. Here it is in its entirety (links added):
Some of you may have noticed in the news today mention of new regulations by the USEPA on SO2 and NOx emissions. The title of the articles could have been, "The SO2 trading program is dead. Long live the SO2 trading programs!"
Since many of us use the SO2 program as the epitome of what a trading program should look like and teach about it in our classes, I thought you might be interested in a quick overview of what led up to yesterday´s announcement and what it means for trading in the future. I am not an expert in this area, but have been watching these developments for some time.
2004. EPA determines that 28 states and DC contributed significantly to nonattainment in downwind states. This violates the Clean Air Act.
2005. EPA issues the Clean Air Interstate Rule (CAIR) with regional caps and a reduced aggregate cap. Trading continued under these rules.
2008. CAIR was challenged on a number of grounds (North Carolina v. EPA). Judge rules it does not comply with the Clean Air Act, which "requires states to limit emissions from sources that "contribute significantly" to nonattainment ... in downwind states."
July 2010. EPA issues the Transport Rule, a temporary fix to the problem. Trading of SO2 allowances appears to have stopped in May 2010.
July 7, 2011. EPA announces the final Cross-State Air Pollution Rule (CSAPR). From what I've read, CSAPR might be challenged, further delaying implementation of future trading. But if it goes ahead as planned, here's what we'll see.
CSAPR sets up four trading programs in place of the national SO2 trading program and the regional NOx programs. There are limits on the trading so that aggregate emissions from each state are capped, but I'm not entirely sure how this is ensured within the trading system.
Needless to say, there are a wide range of economic issues that deserve further analysis; I'm sure that the program will yield plenty of papers and dissertations. One aspect that I find interesting is that there is no phase in to this regulation -- SO2 allowances held by firms are retired without compensation.
You can access the complete document (1323 pages), summaries, etc. at EPA's web site:
http://www.epa.gov/crossstaterule/ & http://www.epa.gov/crossstaterule/actions.html
I paste below a couple of informative paragraphs taken from the final rules and EPA's fact sheet.
"In light of the specific circumstances of this case, including legal and technical issues discussed in Section IX.A.2 below, the final rule will not allow any carryover of banked SO2 or NOX allowances from the Title IV or CAIR trading programs.
"The final rule establishes four interstate trading programs, each starting in 2012: two for annual SO2, one for annual NOX, and one for ozone-season NOX. One SO2 trading program is for sources in states (referred to as SO2 Group 1) that need to make larger reductions to eliminate their significant contribution, while the second is for sources in states (referred to as SO2 Group 2) that need to make smaller reductions. A source in a Group 1 state can only use SO2 allowances allocated to Group 1 states for compliance with the SO2 trading program. A source in a Group 2 state can only use SO2 allowances allocated to Group 2 states for compliance with the SO2 trading program. For compliance in the annual NOX and ozone-season NOX trading programs respectively, sources may use annual NOX and ozone-season NOX allowances allocated for any state, even if that state is in a different group for SO2 than the source's state. Four sets of new emission allowances based on the new state-specific budgets without variability are allocated to sources, one set for each of the four trading programs. Each state has the option of replacing these FIPs with state rules.
"The final Cross-State Air Pollution Rule allows sources to trade emissions allowances with other sources within the same program (e.g., ozone season NOX) in the same or different states, while firmly constraining any emissions shifting that may occur by requiring a strict emission ceiling in each state (the budget plus variability limit).
"In each of the four trading programs, a covered source is required to hold sufficient allowances (issued in the respective trading program) to cover the emissions from all covered units at the source during the control period. EPA assesses compliance with these allowance-holding requirements at the source (i.e., facility) level.
In a summary of the benefits and costs of the policy I completely ignored the trading aspects (surprise!).
Also, note that Richard has guest posted here before and we need to something to do a better job of making this blog more attractive to guest posts (e.g., separate the wheat from the chaff?).