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The Temporal Efficiency of SO2 Emissions Trading

A. Denny Ellerman & Juan-Pablo Montero

September 2002

A. Denny Ellerman & Juan-Pablo Montero, September 2002

This paper provides an empirical evaluation of the temporal efficiency of the U.S. Acid Rain Program, which implemented a nationwide market for trading and banking sulfur dioxide (SO2) emission allowances. We first develop a model of efficient banking and select appropriate parameter values. Then, we use aggregate data from the first seven years of the Acid Rain Program, to assess the temporal efficiency of the observed banking behavior. We find that banking has been surprisingly efficient and we discuss why this finding disagrees with the common perception of excessive banking in this program.

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