Allowance trading under the Clean Air Act: Who should regulate, and when?

The goal of this paper is to explore how compliance with the Clean Air Act Amendments of 1990 (CAAA), especially Title IV and emission trading under it, will affect the current relationship between state and federal regulation. It is difficult, with the limited experience we have had under Title IV, to be definitive about or to be a very strong advocate of too many policy positions. What may be most helpful at this point is to identify where the difficult issues in state/federal relations might arise; and then to explore ways in which tensions might be either avoided or resolved. One anticipated conclusion is that a traditional regulatory mindset could be very destructive if applied to this new area of oversight without due sensitivity to what Congress is trying to achieve in Title IV. That concern pervaded the early legislative debates; and it persists today. Title IV presents some unique challenges to state regulators and will require some creative solutions and fresh thinking if the goals of Congress are to be realized and the full benefits that allowance trading can offer are to be reaped by electricity consumers. In the ultimate analysis, Title IV amounts to a massive internalization of the external costs imposed on society by acid rain deposition. (This places in serious question the notion of additional externality {open_quotes}adders{close_quotes} for sulfur dioxide (SO{sub 2}) and nitrous oxide (NO{sub x}) at the state level for utility supply planning purposes.) The whole point of Title IV is to give those directly charged with compliance, namely power producers, the maximum flexibility to pursue least-cost compliance solutions. Perhaps the biggest single factor in how well they do this will be how state regulators respond to their compliance and allowance trading initiatives.