The 1990 Clean Air ActAmendments (CAAA) introduced tradable permits for controlling sulfur dioxide (SO2) emissions from coal-burning power plants and forced scrubbers to compete with other SO2 abatement options. While the flexibility of permits reduced overall compliance costs, a secondary...

Tradable permit schemes introduce uncertainty into the cost of regulatory compliance due to the permits’ uncertain price. Regulated firms can hedge this uncertainty through their contracts for fuel procurement. Data on coal contracts are used to estimate how the option not to be delivered...