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Capping Emissions: How Low Should We Go?

Investigating where environmental efficiency and good public policy intersect.
Fortnightly Magazine - December 2002

While none of the bills propose the type of non-uniform trading ratios we suggest, the Jeffords bill proposes separate trading areas for SO 2, and Clear Skies proposes separate areas for NO x.

When tradable permits were introduced for SO 2 in 1990, air pollution policy took a turn toward a more efficient strategy. Regardless of the level of pollution reductions attempted, tradable permits provide a way to achieve that level at less cost than traditional regulation. Our research suggests that-if the qualitative aspects of the policies remain efficient-lowering the pollution cap for SO 2 and extending it to NO x would be an additional improvement in economic efficiency. The three bills introduced in the last Congress all fall within a reasonable range of emission levels. Yet the importance of the qualitative aspects of air pollution policy should not be underestimated. How emission allowances are distributed is expected to have a large effect on the cost of the program, and therefore on the efficient level of emission reductions. In addition, the power of a cap-and-trade strategy is strongest in the absence of superfluous technology-based regulations.

  1. For more information about the Haiku model, see Anthony Paul and Dallas Burtraw, "The RFF Haiku Electricity Market Model," Washington, DC: Resources for the Future, June 2002. Available at (accessed 10/28/02).
  2. TAF was developed to support the National Acid Precipitation Assessment Program (NAPAP). An earlier version of the model, along with documentation, is available at aflist .
  3. Dallas Burtraw, Karen Palmer, Ranjit Bharvirkar, and Anthony Paul, "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," Resources for the Future Discussion Paper, Jan. 30, 2001.
  4. As a baseline, we assume implementation of the summertime NO x SIP Call trading program in 2004 in 19 eastern states, and the continuation of the Title IV SO 2 cap-and-trade program. We assume no additional regulations affecting mercury or CO 2 and no additional enforcement of new source review beyond settlements already announced. We assume limited restructuring of the electricity sector with retail competition in about half of the country.
  5. The addition of such caps would promote fuel switching and other abatement activities that would be likely to lower the cost of SO 2 and NO x allowances.

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