The Political Economy of Market‐Based Environmental Policy: the U.S. Acid Rain Program

Abstract

The U.S. acid rain program enacted in 1990 gave valuable tradable sulfur dioxide emissions permits—called “allowances”—to electric utilities. We examine the political economy of this allocation. Though no Senate or House votes were ever taken, hypothetical votes suggest that the actual allocation would have beaten plausible alternatives. While rent‐seeking behavior is apparent, statistical analysis of differences between actual and benchmark allocations indicates that the legislative process was more complex than simple models suggest. The coalition of states that produced and burned high‐sulfur coal both failed to block acid rain legislation in 1990 and received fewer allowances than in plausible benchmark allocations. Some of these states may have received additional allowances to cover 1995—99 emissions by giving up allowances in later years, and some major coal‐producing states seem to have focused on benefits for miners and on sustaining demand for high‐sulfur coal.