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The Potential for Cost Savings in the Sulfur Dioxide Allowance Market: Empirical Evidence from Florida

Since the passage of the 1990 Clean Air Act Amendments, researchers have hastened to appraise the new market for sulfur di-oxide (SO₂) emission allowances. As the EPA’s program moves into its second phase, some analysts question whether large enough savings are available to induce widespread market participation. This study calculates the shadow prices of emission reductions for power plants that serve Florida and compares the actions of utility owners to the actions predicted by the shadow prices. The evidence suggests that plant owners have not taken full advantage of the opportunities the allowance market has provided to date. (JEL Q40)