When the scheme became federal law in 1990, some environmentalists blasted it as a "license to pollute." And, in a sense, it was -- and still is.
Electric utilities that operated the 445 biggest and dirtiest power plants across the country were granted a certain number of "allowances," each of which effectively licensed a plant to spew into the atmosphere one ton of sulfur dioxide, chief cause of the acid rain that is blamed for killing lakes and forests.
Moreover, if a power plant wanted to emit more pollution than it had allowances for, it could buy additional allowances from other power plants that had more than they needed. A lively market sprang up, allowing power plants to buy and sell allowances at any price they agreed upon.
But the system, set up by the Clean Air Act Amendments of 1990, actually was intended to cut air pollution. And that's exactly what it did. In fact, environmental economists say, the system cleaned the air faster and cheaper than the old method of setting limits that had to be met by each power plant.
Soon after the measure took effect in 1995, the 445 plants covered by the law cut their aggregate SO2 emissions to an amount almost 40 percent less than they were licensed to emit. In 1990, before this system of "emissions trading" went into effect, the power plants released about 10 million tons of SO2 into the atmosphere. The new law set a cap of 8.7 million tons to be released in 1995 and apportioned enough allowances to cover exactly that amount.
To almost everyone's surprise, electric utilities liked the new system so well that they beat the deadline. Compliance came so fast that in 1995, the actual amount emitted was just 5.3 million tons. As a result, the atmosphere has been spared at least 3.4 million tons of SO2 per year.
The amount emitted is known precisely because the law also requires that every smokestack have a device that measures the SO2 being released and relays that information directly to government monitors. Since 1995, the industry has continued to cut SO2 emissions, although not as rapidly as that first year. Next year, phase two of the law kicks in, requiring all power plants to comply -- not just the "big dirties" affected in 1995 -- and cutting roughly in half the amount of pollution permitted by each allowance.
Along with the rapid decline in air pollution, the system turned out to cost less than half of what was originally estimated to achieve comparable cleanup under the traditional "command-and-control" method. In that system, governments demanded that each plant cut back by the same percentage, in effect penalizing already-efficient plants.
"The acid rain . . . program is creating real environmental gains much more cheaply than ever before thought possible," says Joseph Goffman, who, along with his associate Dan Dudek at the Environmental Defense Fund, was an early advocate of the scheme.
An independent analysis by economist A. Denny Ellerman and colleagues at MIT comes to a similar conclusion: "This market-based alternative to conventional command-and-control approaches to environmental regulation has offered a refreshingly positive experience."
The method works so well that emissions trading is being advocated for other forms of pollution such as carbon dioxide, which has been blamed for global warming. In other cases, such as toxic chemicals, environmental policy experts warn that it would not work.
So exactly how were the SO2 reductions achieved?
The scheme worked, analysts say, because it recognized that the cost of cleaning up was not the same for all power plants. Depending on the plant's design, location and pollution control technology already in use, some power plants need to spend much more than others to protect the atmosphere against the same ton of SO2.
With emissions trading, allowances were handed out in proportion to the amount of fossil fuel used. Thus plants that could clean up relatively cheaply could offset those costs by selling allowances that they didn't need. There was a market for those allowances because plants that were more expensive to clean up preferred to buy allowances rather than pay to install pollution controls. In some cases, the income from the sale of allowances was enough to offset the price of otherwise prohibitively expensive cleanup technologies, making them affordable.
By the time the market in smokestack scrubbers (which remove sulfur from exhaust gases), low-sulfur coal (which keeps sulfur out of the furnace in the first place) and SO2 allowances shook itself out, the atmosphere won bigger than most people had expected.
Emissions trading has had one more effect: allowing ordinary citizens to help in the cleanup. Because SO2 allowances are sold on an open market -- where the going rate is $100 to $200 per ton -- environmental organizations and school groups have bought allowances for themselves, not to emit SO2 but simply to reduce the number available to the power industry.
Boyce Rensberger, a former Washington Post science editor, is director of the Knight Science Journalism Fellowship program at MIT.