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A Case Study In Pollution Markets: Dismal Science Vs. Dismal Reality

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  • JANE V. HALL
  • AMY L. WALTON

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.

Suggested Citation

  • Jane V. Hall & Amy L. Walton, 1996. "A Case Study In Pollution Markets: Dismal Science Vs. Dismal Reality," Contemporary Economic Policy, Western Economic Association International, vol. 14(2), pages 67-78, April.
    • Handle: RePEc:bla:coecpo:v:14:y:1996:i:2:p:67-78
    DOI: 10.1111/j.1465-7287.1996.tb00614.x
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    References listed on IDEAS

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    1. Randolph M. Lyon, 1982. "Auctions and Alternative Procedures for Allocating Pollution Rights," Land Economics, University of Wisconsin Press, vol. 58(1), pages 16-32.
    2. Hahn, Robert W, 1990. "The Political Economy of Environmental Regulation: Towards a Unifying Framework," Public Choice, Springer, vol. 65(1), pages 21-47, April.
    3. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring.
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    Cited by:

    1. Fowlie, Meredith & Perloff, Jeffrey M., 2004. "The Effect of Pollution Permit Allocations on Firm-Level Emissions," CUDARE Working Papers 25116, University of California, Berkeley, Department of Agricultural and Resource Economics.
    2. Meredith Fowlie & Jeffrey M. Perloff, 2013. "Distributing Pollution Rights in Cap-and-Trade Programs: Are Outcomes Independent of Allocation?," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1640-1652, December.
    3. Lata Gangadharan, 2004. "Analysis of prices in tradable emission markets: an empirical study of the regional clean air incentives market in Los Angeles," Applied Economics, Taylor & Francis Journals, vol. 36(14), pages 1569-1582.
    4. Sovacool, Benjamin K., 2011. "The policy challenges of tradable credits: A critical review of eight markets," Energy Policy, Elsevier, vol. 39(2), pages 575-585, February.
    5. B Hansjürgens, 1998. "The Sulfur Dioxide Allowance-Trading Program in the USA: Recent Developments and Lessons to be Learned," Environment and Planning C, , vol. 16(3), pages 341-361, June.
    6. Larson, Donald F. & Parks, Paul, 1999. "Risks, lessons learned, and secondary markets for greenhouse gas reductions," Policy Research Working Paper Series 2090, The World Bank.
    7. Hall, Darwin C., 1998. "Albedo and vegetation demand-side management options for warm climates," Ecological Economics, Elsevier, vol. 24(1), pages 31-45, January.
    8. Kurt Stephenson & Patricia Norris & Leonard Shabman, 1998. "Watershed‐Based Effluent Trading: The Nonpoint Source Challenge," Contemporary Economic Policy, Western Economic Association International, vol. 16(4), pages 412-421, October.

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