Data: Clearing the Smog

After a slow start, the federal government's national sulfur dioxide trading program shows signs of hitting its stride. (See "Selling Air Pollution," May 1996.)

Established by Title IV of the 1990 Clean Air Act, the sulfur trading program applies market discipline to pollution reduction. Instead of just commanding electric utilities–the biggest sulfur dioxide polluters–to cut emissions, it grants the utilities annual allowances, worth a ton of sulfur dioxide each, with the number falling every year. If one utility can figure out a way to reduce emissions more cheaply than another, it can sell its extra allowances. This gives utilities an incentive to make extra reductions, since they can now profit from their relative cleanliness.

The program didn't instantly produce a robust market, for various reasons. For example, many utilities won't enter the program until 2000; an allowance's status as property isn't secure; and many state regulators haven't yet decided how to treat money made from selling allowances in determining the rates utilities may charge. The General Accounting Office reported in 1994 that utilities were missing out on a potential $1.2 billion in savings because of the small number of trades.

Since 1994, however, the number of allowances traded has skyrocketed by nearly 400 percent–from 881,852 traded in 1994 to 4,407,301 in 1996. And the trading program is cutting pollution as well as saving money: Emissions in 1996 from utilities already covered by the sulfur trading program are 35 percent below the yearly cap of 8.3 million tons.