Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience

Juan-Pablo Montero

Attention to tradable emission permits (or emissions trading) as an alternative to the traditional command-and-control (CAC) approach of setting uniform emission and technology standards has significantly increased in the past decade or so. A notable example is the 1990 U.S. Acid Rain Program that implemented a nationwide market for electric utilities' sulfur dioxide (SO₂) emissions (Schmalensee et al. 1998; Ellerman et al. 2000). To have a precise estimate of the SO₂ emissions that are going to the atmosphere, the Acid Rain Program requires each affected electric utility unit to install costly equipment that can continuously monitor emissions. Another example with similar monitoring requirements is the southern California RECLAIM program that implemented separated markets for nitrogen oxide (NO_X) and SO₂ emissions from power plants, refineries, and other large stationary sources.¹

These and other market experiences, which are also documented by Stavins and Tietenberg elsewhere in this book, suggest that conventional tradable permits programs are likely to be implemented in those cases where emissions can be closely monitored, which almost exclusively occurs in large stationary sources like electric power plants and refineries. At least this is consistent with the evidence that environmental authorities continue relying on CAC instruments to regulate emissions from smaller sources for which continuous monitoring is prohibitively costly (or technically unfeasible). In such cases, compliance with CAC instruments only requires the authority to ensure that the regulated source has installed the required abatement technology or that its emissions per unit of output are equal or lower than a certain emissions rate standard.

-147-