The price of pollution: A dual approach to valuing SO2 allowances

Under the 1990 Clean Air Act Amendments, a market-based scheme to reduce U.S. sulfur dioxide emissions takes effect in 1995. Indications are that participation in the market will be light and allowance prices will be lower than was once expected. Using an output distance function approach, for Wisconsin coal-burning utility plants we estimate the shadow price of SO2 abatement, which should approximate the allowance price. The estimated average shadow price is above the prices at which the few observed allowance trades have occurred. Wisconsin's stringent state SO2 legislation may explain a portion of this divergence. (C) 1996 Academic Press, Inc.