 So today we're going to talk about the acid rain program. Now there are in effect two acid rain programs. So before you take the exam, you should know one from the other. There's a good acid rain program and a bad acid rain program. So here's a cute picture of acid rain. You burn electricity. You burn coal to create electricity. Sulfur dioxide and nitrous oxide goes up into the air. It makes the rain acidic. The rain falls on the forest, kills the trees and the fish and the animals. So Pennsylvania is a big producer or was of acid rain. And so starting in the 1970s, people said, hey, this is a problem. And so this comes from burning coal. Basically you create sulfur dioxide. And it's generally conceded that burning coal creates sulfur dioxide, and this is bad. So now the question we're going to talk about today is, given that it's bad, how are we going to deal with it? What are we going to do to regulate utilities to deal with this problem? So anyhow, there was one set of laws in 1970 to Clean Air Act. But in 1979, there was a push to change the law. And the reason for pushing to change the law is to protect the job of eastern coal miners. So we have this problem. The coal emits sulfur dioxide, and you could deal with this three ways. One is you could get clean coal, or relatively clean coal. It turns out that in the west, in Wyoming, the Powder River Valley, there's much cleaner coal than is dug up around here. So you could ship that across the country and burn it here and solve the problem. Or you could do something called coal washing, which I've never really understood. Or you could do the most expensive thing to use scrubbers. So let me take a look at this. So you burn the coal, it goes up, it goes over here, and you scrub it. Well, basically you run it through all these compounds. CAO, it's that calcium oxide. I've told you a long time since I took chemistry. And water, and all this stuff comes out. And it's really expensive. So what the government decided, Congress and the president, in the late 1970s is that they were going to require scrubbers to be placed on all coal stacks. And this would reduce sulfur dioxide, but maybe not as much as you might want. So here's the first question. Why does the government care about how pollution is reduced? And of course, the government has a reason for wanting pollution reduced. But why do they care how you do it? So this story is about how environmental rules were used as a cover for a very expensive jobs program. And so what happened was, is you increase cost to everybody, but just a little bit. And you concentrated these benefits on coal miners and, of course, coal mine owners. So this is why you care about direct implementation and why you choose the most expensive route, OK? Anybody know who this guy was? A senator? Any ideas which one? The flag gives away that he's a national politician, right? This guy, his name is Robert Byrd. He was one of the most powerful senators ever. He was a senator from West Virginia for 50 years. He was the longest serving senator in US history. And pretty much every school in West Virginia is named after him, OK? He became chairman of the Senate Appropriations Committee, OK? His seniority in leadership in the Appropriations Committee enabled him to steal a great deal of federal money towards West Virginia. And of course, he was from West Virginia. And he was just incredibly powerful. So where does coal come from? Actually, coal comes from a lot of places. But it differs in characteristics. So there's a map, a map of the United States. And so, I mean, there's coal that we are. You can see that Appalachian coal. And then there's some Missouri and Illinois coal. Then there's a coal down in Texas, which really isn't very good. And then up in the Northwest in Wyoming is the really good stuff, OK? And so if it was just competition and pollution mattered, people would move away from the eastern coal. So what Senator Burr did to save jobs for West Virginia was he passed a rule such that the sulfur content of the coal didn't matter. And so if everybody has to have a scrubber, then you can put whatever coal you want in there. Doesn't matter. And so of course, if it doesn't matter what coal, then you're not going to ship all this coal from Wyoming into Pennsylvania. Instead, you just use the same old dirty coal. Now, this costs a lot of money. Who paid for it? Us. But how? Not taxes. There's something close in my mind. Energy prices for what? For electricity. OK? So all these costs went into the price of electricity. Did anybody notice? It's $5 here, $10 here, $5 for you, $6 for you, $12 for you, $5 for you. It's this cost that's so spread out unless you're really paying attention. People don't notice. OK? So this is this idea I was trying to get across last week. OK? You know, you want to get subsidy from the government? One, you've got to be a small group, Eastern coal miners. Two, you've got to be able to spread out the cost here in everyone's electricity price. And three, anybody remember the third part? You've got to go ahead. Well, no, that's always important, of course. Why couldn't Donald Trump get $1 billion from the Congress? Yeah, you have to be able to get past rationally ignorant people. So in this program, if you wanted to push it through, what would you call it? How would you sell it to rationally ignorant people? Yeah, you can do that. It's cleaning the coal. We're a pro-environment. You see, this is when people say they're a pro-environment, I always start looking around for my wallet. Because I think about this story, where special interests could get together and get some money for themselves and spread out all the charges. And by the way, I think of solar energy in this state the same way. You know, everybody's forced solar energy, or you think they do. Of course, you know, it's cloudy a lot here. And there's a big subsidy to it. All right, so let's think about this. Three elements, three, three, three, tightly concentrated beneficiaries, coal miners in eastern states, widely dispersed cost, a few dollars in everybody's electricity bill, and a cover story to fool rationally ignorant voters. We're doing this to save the environment. Well, that always looks good. And by the way, if you're a legislator, it can be very painful to vote against something like this. Even if you figure it out, which is, you know, legislators are very busy. Do you want to be known as the person who voted against environmental legislation? You know, once you can get environmental label on something, it gets a lot easier to pass. So this was a bad, bad program. So I want you to remember that the late 1970s program with scrubbers was really bad. It was just a method of allocating money to eastern coal miners. But now there's a good side. The second part, creating a market for permits. So you know, economists have had this permit story, which you've been doing endless homework problems about for a long time. But policymakers didn't take it too seriously until somebody decided to apply it to acid rain. So in the 1990 Clean Air Amendments, sulfur dioxide emissions would be to reduce $10 million per year. But instead of using a tax or using this command and control system, I should go back for a second, command and control, of course, is the bad guy to economists. Command and control says, hey, you do what we tell you to to reduce pollution. We command you and we control you. We think that's bad because it doesn't allow for trading. So this scrubber program was a real example of command and control. So in the 1990 program used a permit system. And I'll try to describe how that worked. So there were these permits you could buy. And you can buy them on the Chicago Board of Trade until they made the program more complicated. So who am I going to pick on here? Maybe I'll walk to the back of the class. I don't know. So how do you feel about acid rain? Probably about that. Well, let me explain. Explain something. What's your name? I'm Chris. Hi, Chris. How you doing? I'm getting out. OK. Where are you from? I'm from Stickark. Sorry about that. Did you go to State High? I didn't, yes. Do you have any of the McGowan's for math? I did not. Oh, OK. Then I won't say anything bad. My daughter has had both of them for math. So here's what we're going to do, Chris. If you want to reduce sulfur dioxide for a ton, you can buy a permit. Would you like to? No. No? Why not? You have to buy something. I thought you cared about the environment. Like money, too, I guess. Yeah, money. Well, the price varied. But how about $300 to require to retire a permit? Would you pay that? We'll make money, maybe. Well, no, no, no. You want to arbitrage it, right? You want to buy it and sell it? Is that what you're saying? But if that $300 puts me in the negative and makes it harder for like, yeah, I'm not a friend. I don't think I'm a friend. Well, I know you've got to spare $300 in your pocket. Then I might. What if we took up a collection? What if we got $10 from everybody in this class to buy a permit? Would you guys be interested in that? Because this is what fifth grade classes used to do. None of you are excited. Wouldn't you like to own your own pollution permit? And then when your friends come over, you say, here's this permit. Because of me, there's one less ton of sulfur dioxide in the atmosphere. Wouldn't you like that? Wouldn't it help at parties? I don't know. I'm not good at parties, Chris. How are your parties? I don't really like them. But maybe if you had a party at your apartment and you showed that plaque, and then people would like you better. I don't know if it works, tell me, OK? And maybe I'll adopt it. OK, so you can buy these permits. And environmental groups would buy these permits firms would buy them. Elementary school classes would buy them. Mostly utilities would buy them. OK, so let's see here. Each firm would be issued markable permits based on its previous output. Now, here's the problem that I've alluded to before. In theory, if you believe there are no transactions cost, then it doesn't matter whether you give away the permits or sell them off, except of course if you're the firms. And what happens is to get a program like this full, you can't make them pay for most of the permits. Because firms will say, look, we're getting this stuff for free. Now you want to make us pay for it, we're opposed. And all these firms have political power. And so what they do is they say, well, you know, we're OK with the permit trading program, but you've got to give us the permits. But then the government comes back and says, we're going to auction 2.8% off some small amount. And so originally, you could buy a permit for $130, $150. What a bargain. So there'd be an auction. So who buys these? It turns out, and I never understood this, but the people who bought these permits were coal companies. And then when they sold electricity to power plants, when they sold coal to power plants, excuse me, they would also sell the permits. Hi there. Please buy 100 tons of our coal. We'll bundle in the permits. Not quite sure why they're doing this. And environmentalists would buy some, and fifth grade classes would buy some. But it was mostly coal companies selling to utilities. Now, you might at this point, what about Senator Byrd? Well, of course, if you're going to do a program like this and Senator Byrd is a very powerful senator, then basically you have to pay him off. I mean, I don't mean pay him off by giving him money, but pay him off by taking care of his people, his constituents. And so what they said was, OK, if you have a scrubber, then we'll give you extra permits to sell off. So you've got a scrubber, OK, fine, we'll give you 1,000 permits or 5,000 permits or whatever. And then you can sell it off. So it was kind of a hybrid program. Now, of course, these things are never the economist ideal, which is always one of the hard parts about working as an economist for the government in that you have this textbook example, hey, I'd like a tradable permits program. And then you've got to get it by Senator Byrd. And you always wonder when you're involved in this whether or not you've sold your soul. You keep making compromises, and in the end, you kind of lose track. So once I had a plan to actually, when I worked for the government in 1985, I had a plan to sell off the cargo bay on the space shuttle, which is true. And the plan became government policy. Anybody know what happened next? What happens to space shuttles? What happens bad to space shuttles? They blow up, yeah. And we realized afterwards that we'd basically sold our soul to the department of NASA, which, by the way, is the worst bureaucracy in town. Those people are really mean. Anyhow, so you look at policy like this, you say, aha. They took our advice, and then you go, well, not really. And did we make the world a better place? And actually, in this program, I think we did. Not me, I wasn't part of this one. But I think this made the world a better place but I think this made the world a better place but not quite the way people expected. All right. So Dallas Bertra wrote a nice paper on this. Actually, there's two versions of it, both of which I posted. I was trading emails about him. He actually wrote this article right before people started posting things on the internet. So I couldn't find it, and then he couldn't find it. So it took a while. All right, so Bertra, the other thing about policy is that you come up with these bright ideas and then you get people to implement them, and then you go away. It's very rare when you follow up on a policy and see if it came out the way you predicted it would. And of course, the reason for this is because it never comes out the way you predicted. So he talks about the 19 surprises to the 1990 amendments. Now remember, the 1990 story is the good story, as opposed to the 1979 story, which of course is the bad, bad story. Okay, so the first thing you came up with is that the cost of reaching the standards was much lower than what everybody thought. You know, people predicted that the price of these permits would be like $800, and they never were. They were like $200, okay? So dealing with these programs was a lot cheaper than what people thought, or sad at least, okay? The second thing is that not that many permits were traded. Now think about what that means, and here I'm stepping on myself. So far we've talked about how trading creates wealth. Yet this program, which clearly created wealth because it made dealing with pollution a lot less costly, didn't actually have a lot of trading, okay? And so what Bertrand argues is that the 1990 Clean Air Act amendments represent not one step forward, which is trading, but actually two giant steps forward. All right, so now I'm gonna try to take a giant step. You gonna get this on camera, Patrick? Oh! Boom! Okay, don't edit that. Okay? Anyhow, so now we come back to our friend Professor Kos. And people misunderstand Kos. One half of Kos is that in a world without transactions cost, the initial allocation of resources does not matter. Okay, that's a nice story. But this used to drive Kos crazy when people said this, because he would say, hey, that's not what I'm trying to say to you guys, because the world I live in has lots of transactions cost. And in those worlds, the allocations do matter. You see, you know, there's always transactions cost, okay? Now, for sulfur dioxide permits, okay, at least in the time period, all of the utilities were subject to what's called rate of return regulation, which basically means the government looks at them and says, here are your costs, so here's what you can charge. And the government hated it a lot of governments really hated it when these utilities would sell permits. Why would that be? They're making money by polluting. They'd say, you want us to approve your transaction that will cause you to make money by polluting, or worse, you want to buy permits so you can pollute more. So this would really turn it down. So if you wanted to get your permit trading approved, you had to go file a higher lawyers and go convince regulatory commissions to let this happen. So the reason we think that there weren't many trades, it was just basically because you had to hire expensive lawyers to make it happen. And so this is why if you look carefully at the homework problems, you'll see that the cost of abatement in a world with zero transactions cost, which is part one, is a whole lot less than part two, a world where one, you have transactions cost and two, I cleverly allocated the permits to the firms who had the lowest value for them. So the first step forward was tradable permits, that you could trade these things and take advantage of gains from trade. But the second and what was probably more important move was to, from command and control, where the technology is dictated by the government, you must use scrubbers, to a world where government says, hey, you got to cut down pollution, but we don't care how you do it, that's your problem. And it turned out people would think of more and more ways of reducing pollution. And of course, one of the biggest ways was just getting the coal from Wyoming. And that was a big way of reducing costs. So why were prices so low? And they really were low. I mean, there are all these kinds of estimates anywhere from $600 to $1,500 per ton, but they were in the 120, 150 range. And so one of the questions that Bertrand deals with is why was the price so low? Well, one reason, of course, is we had to pay off Senator Bird. So basically they allocated 3.5 million permits, I think the total was maybe 15 or 16. And then of course more plants put in scrubbers, so now you've increased the supply and reduced the demand. So that's gonna lower the cost. Well, the scrubber technology got cheaper. The same thing is that railroads got a lot more efficient. Now we don't think very much about railroads anymore. Railroads hauled cargoes across the country. Nowadays the biggest cargo they haul is coal. But what happened was railroads got a lot more efficient. And so now there was more railroad competition. And so the cost of shipments got cheaper. And then there's something my friend Dr. Matthews works on. So eliminating command and control regulation is kind of surprising. You know, it allowed some trading, but it also allowed for low cost sulfur to be used. So one of the lessons here is that if you're gonna let markets do things, you don't know what's going to happen. And you hope that technology moves forward rather than backwards. Now what I mean by technology moving backwards? Is it possible we come, you know, in 10 years we'll have more technology or less technology. What do you think? Will we lose any technology over the next 10 years? Probably not. So if you think there's gonna be technological progress, and if there isn't then there are whole parts of this university that should be closed, then you wanna give firms the choice. And of course the other thing is there's all kinds of innovations that you can't anticipate. You know, I have no idea what innovations are gonna be in 10 years. And I know people work on such things. It's all magic to me. I can't imagine what we're gonna do in the future to fight pollution or anything else. But I really wanna have government rules. I don't wanna have government rules that prohibit its from happening. I wanna give people the incentives to engage in technological progress and, you know, to reduce cost.