The Politics and Economics of Auction Design in the Market for Sulfur Dioxide Pollution

The Clean Air Act Amendments of 1990 aim to create a market in emissions of sulfur dioxide from power plants by distributing a fixed number of tradable pollution permits called “allowances, ” and by providing for the auction of a small fraction of the total number of allowances. This article describes potential inefficiencies in this market and how an auction could enhance the market. It shows that the method by which allowances are “bundled together” for auction is an important efficiency-related element of auction design. The article also examines the politics of auction design and how equity goals strongly shaped the design ultimately adopted by Congress. Finally, some implications are suggested for the role of policy analysis in the legislative process.