A CASE STUDY IN POLLUTION MARKETS: DISMAL SCIENCE VS. DISMAL REALITY
Jane V. Hall is Professor of Economics and Associate Director of the Institute for Economic and Environmental Studies at California State University, Fullerton, Calif., 92634. Amy L. Walton is Manager of the Science Research and Technology Program, Space and Earth Sciences Directorate, the Jet Propulsion Laboratory, Pasadena, Calif. Both are members of the Advisory Council to the South Coast Air Quality Management District Board of Directors. This is an expanded version of papers presented at the Western Economic Association International Annual Conferences at Lake Tahoe in 1993 and San Diego in 1995 in sessions organized by Anne Sholtz and Anil Puri, and at the Western Economic Association International Pacific Rim conference in Hong Kong in 1994 in a session organized by Darwin Hall.
Abstract
Economists long have argued that economic incentives can reduce pollution more efficiently than do narrow regulatory prescriptions, but this theory has not enjoyed wide application. Southern California experiences the worst air pollution in the United States and has developed the most complex set of regulatory approaches in the world to address the problem. Rising costs and increasing resistance to further regulation led to the Regional Clean Air Incentives Market (RECLAIM) program, which is expected to reduce pollution control costs by about 50 percent over a decade (relative to direct regulation). This paper describes the theoretical advantages of pollution trading, clearly identifies three criteria that acceptable economic incentive-based programs must meet, explains the structure of RECLAIM, and raises issues regarding firm behavior in response to a newly created asset with an initial price of zero.
Abbreviations
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- AQMP
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- Air Quality Management Plan
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- AQS
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- Air quality standards
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- CARB
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- California Air Resources Board
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- EPA
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- Environmental Protection Agency
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- ERC
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- Emissions reductions credits
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- NOx
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- Nitrogen oxides
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- RECLAIM
-
- Regional Clean Air Incentives Market
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- ROC
-
- Reactive organic compounds
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- RTC
-
- RECLAIM Trading Credits
