I am not a psych, but can I offer my two cents?
I totally know how you feel. Both of my daughters were very attached to their pacis. Because of pressure from judgmental family members, friends, and even her pediatrician, I felt the need to take my first daughter's paci away at age 2. TRAGIC.
She too was losing sleep over it, cry cry crying at night, and I would just sit in my room and CRY. I would have caved except for the fact that I too have a husband who wouldn't listen to my reasoning- he said 'she'll be fine!' and wouldn't let me give it back to her.
My second daughter, three years later, I absolutely REFUSED to take her paci away at age two. I told the friends, family members, and pedi to STUFF IT! lol.. I did vow that I would never let her have it past her third birthday.
Let me tell you, the transition at age 3 was SO MUCH EASIER. My daughter was able to better understand why she couldn't have it any more, and was better able to reason. A two year old can't reason... they are not congitively able.
The transition was not a stressful one for parent OR child. I know that all children are different, but if I ever have a third child, I will definitely not force them to give up their paci before they reach age 3.
As far as psychological effects, I have no idea. I am inclined to believe that there are short-term effects. I am sure they will be clingy for a few days and grouchy if for no other reason, lack of sleep! But I doubt there are long-term effects. Probably no one really knows that answer, though. What affects one person might not affect another.
Good luck! I thought it would help you to know that you're not alone... and if you should decide to give your child his paci back, I would NOT be judging you!!! lol