Explaining Low Sulfur Dioxide Allowance Prices: The Effect of Expectation Errors and Irreversibility

Juan-Pablo Montero and A. Denny Ellerman

September 1998

Juan-Pablo Montero and A. Denny Ellerman, September 1998

The low price of allowances has been a frequently noted featured of the implementation of the sulfur dioxide emissions market of the U.S. Acid Rain Program. This paper presents theoretical and numerical analyses that explain the gap between expected and observed allowance prices. The main contributing factors appear to be expectation errors augmented by the presence of irreversible investments.


For Associates Only

As a benefit to our Associates, the latest Working Papers are embargoed for a period of up to six months before becoming accessible to the public. If you are interested in becoming an Associate or learning more about the benefits of sponsorship, please click here, or email us at

If you are a CEEPR Associate or CEEPR staff member, please visit the login page here: