Background
Ran from July 1983 to the end of 1986
Aims
The aim of inter-refinery lead trading was to assist regulatory measures requiring a gradual reduction in the lead content of petrol. Between 1975 and 1986 the lead content of fuel was required to fall from 1.7 grams/gallon to 0.1 grams/gallon. Lead trading was to assist this transition due to concerns that small refineries in particular would experience difficulties in complying with the rapid application of these stricter lead content standards.
Coverage
The inter-refinery lead trading scheme applied to all fuel refineries and fuel importers.
Introduced
Inter-Refinery Lead Trading was introduced in July 1983. UNITS The unit of the Lead Trading Program was the "Lead Reduction Credit".
Unit Allocation A lead reduction credit was earned when a refinery produced petrol whose lead content was below the EPA lead content standard for that quarter. Initially standards between small and large refineries differed, but from July 1983 all conformed to the same standards. Once a credit was earned it could then be sold to another refinery that used more lead than the standard. Lead trading allowed refiners and importers to trade lead reduction credits in order to meet limits for the lead content of petrol.
Monitoring and Enforcement Enforcement operated through the assessment of reporting forms completed quarterly by all refineries and importers, spot-checks are little use since data would not reveal whether quarterly targets would be met
Banking and Borrowing Prior to 1985 credits could not be banked for future use and simply expired if not used or sold.
Expectations (Ex ante Analysis)
It was believed that without trading in lead credits that either the phase down to the new lower lead-content level would take longer or that it would lead to short-term contraction in the supply of petrol and possibly supply disruptions in some areas. The EPA estimated 9.1 billion grams of lead would be banked, saving refineries $226 million, and that savings from the lead trading programme would be approximately 20 per cent over alternatives without lead trading.
Unit Performance
Traded Volume Over half the total number of refineries participated in what was a very active market, although larger refiners were more involved than smaller - roughly equal proportions of small traders bought and sold rights indicating that they were not uniformly hard-pressed to meet the new lead standards, but there was some evidence of the difficulties faced by the smaller refiners since in the first six quarters their limits were exceeded and they had to credits from larger refineries who were operating below EPA limits. In anticipation of a lowering of limits in 1985, refineries reduced the lead content of petrol and banked their credits, but whilst most larger refineries were able to do this, fewer smaller refineries did so which resulted in them in exceeding the lead content limit. Many smaller refineries had to again purchase credits from the larger refineries who had banked credits. In an attempt to reduce the number of refineries exceeding their limits, credits could not be banked from 1986 unless purchased from another firm. Up until 1997 Small refineries continued to add more lead to petrol than large refineries. Banked Volume In total 10.6 billion grams of lead were banked, saving 2.5 cents/gram banked.
Environmental Effectiveness
It is difficult to assess the effect of lead trading on the environment since the reduction in the lead content of fuel may not have occurred had only the EPA standards been in place, in which case the lead trading would have had a minimal effect, alternatively if the EPA standards had permitted a more aggressive time profile of reductions that would otherwise have been feasible, then lead trading may have accelerated the reduction in lead emissions from motor vehicles.
Economic Efficiency
Anderson, Hofmann and Rusin (1990) assess the programme as successful, although it may have produced some (temporary) geographic shifts in use patterns. The level of trading activity suggests that the programme was cost-effective and the high level of trading surpassed earlier environmental markets. EPA estimated savings from the lead trading programme of approximately 20% below alternative programmes that did not provide for lead banking, a cost saving of $250 million per year. According to Kerr and Newell (2001), the programme provided greater incentives for cost-effective technology diffusion than did a comparable non-tradable performance standard. A significant amount of both banking (10.6 billion grams) and trading took place, and the estimated savings were several hundred million US dollars. The US lead phaseout system avoided deadlock in the courts (refineries would perhaps have taken the USEPA to court had a different policy instrument been used) and phased out leaded gasoline in a timely manner.
Drawbacks
One unexpected by-product of the system was rent seekers - companies that were set up to blend fuels and then resell them to claim 'lead rights'. They were a nuisance to the USEPA and to the refineries that were 'cheated' our of these rights. These problems would have been avoided if the rules applied only to existing refineries and allowed USEPA to vet new applicants before making them members of the trading scheme.
Related Instruments
Regulatory measures to reduce the lead content of petrol.
References
Anderson, Hofmann and Rusin,(1990); "The Use of Economic Incentive Mechanisms in Environmental Management, Research Paper 51, American Petroleum Institute, Washington DC.
Kerr, Suzi and Richard G. Newell, (2001); "Policy-Induced Technology Adoption: Evidence from the U.S. Lead Phasedown, Resources for the Future Discussion Paper 01-14. ·
OECD, 1997, Evaluating Economic Instruments for Environmental Policy, OECD: Paris. Available at: http://www.oecd.org//env/policies/publications.htm#eistrpub
Sterner, T.(2003); "Policy Instruments for Environmental and Natural Resource Management. RFF.
USEPA, Office of Policy Analysis,(1985); "Costs and Benefits of Reducing Lead in Gasoline, Final Regulatory Impact Analysis", Washington DC ·
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