Abstract: Leading the Charge: The Political Economy of Emissions Trading in the Lead Phasedown

Alan P. Loeb

Abstract

In August 1981 the Reagan White House announced that it would review the "lead phasedown," a set of rules under the Clean Air Act that set the maximum amount of lead allowed in gasoline. Given Reagan's view of regulation, all sides expected that the phasedown would be curtailed. Just the opposite happened. In October 1982 the Environmental Protection Agency issued rules that strengthened the program. Most surprising was the turn-around among refiners. Many who had opposed regulation of gasoline lead since the 1920s came to oppose the White House's deregulatory efforts. Why would an industry decide to abandon its historical opposition to regulation just when favorable politics promised to deliver its victory? First, refiners responded to public opinion, which was squarely opposed to the deregulation. Second, those who had already invested in unleaded octane capacity realized they had a greater interest in competitive equity than in deregulation. But what of the administration's promise to give regulatory relief? That was resolved by designing in an emissions trading program. This allowed small refineries that could not afford to meet the standards by making capital investments to buy lead rights from those who had excess octane capacity and did not need the lead. This tradeoff was unforeseen. Emissions trading had been promoted as a way to get regulatory relief, not to justify regulation. While trading in the phasedown did improve efficiency, as theory predicted, more important was the role the efficiency savings had in creating consensus. This was a breakthrough that opened a new era in regulatory policy and was followed in the groundbreaking acid rain trading program.