ABSTRACT
An international system of tradable emission permits has engendered interest as a way to control emissions of sulfur dioxide (SO2) in Europe. Like other forms of incentive-based regulation, emission permit trading has the potential to achieve a given emissions reduction goal at less cost than command-and-control regulation. However, the full cost-saving potential of SO2 emission trading in Europe’s electricity industry, which generates 65 percent of Europe’s total SO2 emissions, is significantly undermined by the structural and regulatory diversity of that industry. Despite this fact, emission permit trading can be justified on the ground that it would promote the reflection in electricity prices of the social costs of pollution resulting from electricity generation. The internalization of social costs in these prices is critical to Europe’s realization of economic unification and to the liberalization of European energy markets.
