Why have emission reduction credits become the centerpiece of environmental policy reform? To answer this question, as well as to provide a basis for evaluating how successful the reforms have been, some notion of an optimal mechanism for allocating control responsibility must be defined. This mechanism can then serve as one of the benchmarks against which the existing system can be measured.
As is well known in the economics literature, the mechanism that is most closely related to the emissions trading program is the transferable discharge permit (TDP) market. Under fairly general conditions TDP markets encourage rapid compliance with a cost-effective allocation of the control responsibility. Because the emissions trading program created by EPA is a special case of this more general approach, the large amount of analysis which has been directed toward the former can be used profitably to understand, evaluate, and create an agenda for reform of the latter.
There are two principal participants in the process to regulate the amount of pollution in the nation's air. While the regulatory authority has the statutory responsibility for meeting pollution targets, the human sources of the pollutant (such as industries, automobile drivers, etc.) must ultimately take the actions which will reduce pollution sufficiently to meet the target.