Unintended consequences of cap-and-trade? Evidence from the Regional Greenhouse Gas Initiative

Cap-and-trade programs are designed to minimize the overall cost of pollution control by effectively allowing firms with low abatement costs to reduce emissions on behalf of those with higher abatement costs. However, these trades redistribute where emissions are generated, which has important implications for welfare because many pollutants have differential environmental and health impacts depending on where they are emitted. This paper compiles and analyzes a national data set of power plant emissions in order to assess how the Regional Greenhouse Gas Initiative (RGGI), a carbon dioxide (CO2) cap-and-trade program involving nine states in the United States, impacts the emissions and damages from copollutants. Our results suggest that, in addition to achieving its goal of reducing CO2, the program has lowered the quantity of sulfur dioxide (SO2) emissions as well as associated damages in the policy region. However, two factors diminish the overall benefits from the program. First, within the RGGI region, trading shifts electricity generation to locations with higher marginal damages for SO2. Second, there is leakage of electricity generation and emissions to nearby states, although this latter effect is more modest than ex ante analyses predicted.