Title IV of the 1990 amendments to the Clean Air Act initiated a historic experiment in incentive-based environmental regulation by permitting electric generating facilities to trade allowances for emission of sulfur dioxide. To date, relatively little allowance trading has occurred. However, the costs of compliance have been much less than anticipated. The purpose of this paper is to address the apparent paradox-that the allowance trading program may not require (very much) trading in order to be successful. Title IV represented two great steps forward in environmental regulation: (i) a move toward performance standards and (ii) formal allowance trading. The first step has been sufficient to date for improving dynamic efficiency and achieving relative cost-effectiveness. Copyright 1996 Western Economic Association International.
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