Are Cap-and-Trade Programs
More Environmentally Effective
than Conventional Regulation?
A. Denny Ellerman
Like other market-based instruments (MBIs), cap-and-trade programs have been advocated because of the theoretical prediction that they could achieve an environmental objective at less cost than conventional regulatory instruments (Crocker 1966; Dales 1968; Montgomery 1972; Tietenberg 1985). Experience with cap-and-trade systems in the United States over the past decade has confirmed the theoretically predicted economic advantages (Ellerman et al. 2000, 2003; Carlson et al, 2000) and failed to find a degradation of environmental performance (Burtraw and Mansur 1999; Swift 2000). As a result, MBIs, especially cap-and-trade systems, have become widely accepted in the policy community. Recognizing this circumstance, opponents of the use of MBIs tend to attack the assumption that the environmental performance is equal (Clear the Air 2002; Moore 2002). Their argument is that although the economic performance may be better, the environmental performance is worse, and the increased environmental damages outweigh the savings in abatement cost.
This chapter makes the contrary argument that the experience with the cap-and-trade programs suggests that at least this form of MBI may be more environmentally effective than the usual command-and-control alternatives, in addition to being more economically efficient. The evidence rests mainly on the SO2 cap-and-trade system created by Title IV of the 1990 Clean Air Act amendments (also known as the Acid Rain Program), but corroborating evidence emerges from the Northeastern NOX Budget Program and the RECLAIM programs for trading NOX and SO2 emissions in the Los Angeles basin. Despite the small sample, the reasons for the