Impediments to markets for SO/sub 2/ emission allowances

The US Clean Air Act (CAA) of 1990 imposed tighter limits on allowed emissions from electric utilities. The CAA also introduced an innovative SO/sub 2/ market mechanism to help lower the cost of compliance. The annual Environmental Protection Agency (EPA) auctions of emission allowances intended to help usher in the market mechanisms for trading allowances. In that respect, the results have been mixed. A full fledged market for emission allowances has been slow to emerge. Starting with a detailed study of the EPA auctions to date, this paper analyzes and discusses some of the reasons for this slow development.