Are Cap‐and‐Trade Programs More Environmentally Effective than Conventional Regulation?

Abstract

Abstract This essay explains why cap-and-trade programs (in which government establishes an overall cap on pollution but allows firms to trade allocations beneath the cap) can be both more economically efficient and more environmentally effective than prescriptive regulation. It underscores the importance of measuring effectiveness in ex post evaluations, which are defined as achieving the proximate goal (i.e., of emissions reduction), rather than the larger goal of solving the underlying problem (i.e., unhealthy air). The argument in favor of market instruments is supported with data from three emissions trading programs: the SO2 trading regime in Title IV of the Clean Air Act, the NOx budget program created by the EPA to address interstate ozone migration, and the RECLAIM program created by the South Coast Air Quality Management District in Southern California. It is proposed that market instruments represent a new pragmatism in environmental regulation and that they are part of the maturation of the regulatory process.