Emissions Trading, An Exercise in Reforming Pollution Policy

By T. H. Tietenberg | Go to book overview
much less the degree to which these effects could be changed by allowing more flexibility in the new source review process. This information would be helpful in assessing the urgency of this portion of the reform package.The final research need would address our woefully inadequate knowledge of the distinction between the long-run and short-run costs of pollution control. Prior to the construction of any facility, the long- run cost curve is the relevant one, offering a large menu of capital investment control possibilities. After the capital investment choice has been made, however, the short-run cost function becomes relevant; changes in the degree of pollution control at that point are limited by the fixed installed capital.Traditionally, short-run marginal costs of further control rise more rapidly than long-run marginal costs due to the inability to change the capital base in the short run. For policy purposes it is important to know a great deal more about short-run cost functions than we currently do. Our ability to shed light on how much further flexibility in the emissions trading program would increase the cost savings depends on obtaining this kind of information.
CONCLUDING COMMENTS
The U.S. emissions trading program has carved out an enduring role for itself in U.S. air pollution control policy. Although it substantially improved upon the policy which preceded it, it has fallen short of fulfilling the expectations for it in the theoretical and empirical economics literature. Paradoxically, the very attributes which enabled it to gain a permanent place in U.S. environmental policy are responsible for its failure to be fully cost effective.The role of EPA's emissions trading program can be directly attributed to the manner in which it was implemented. It was not only compatible with the traditional command-and-control approach, it was implemented to make the transition as smooth as possible. Furthermore, the very high compliance costs associated with the traditional approach created large potential cost savings from adopting this reform. Had the command-and-control policy been more cost effective, it is doubtful that the emissions trading policy could have gained the foothold it has.Although the ability to overlay this program on an existing policy structure was a key to its political success, it has also diminished the cost effectiveness of the program in several specific ways:
In response to command-and-control regulations, a large amount of expensive, durable capital control equipment had already been installed

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