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Is Air Pollution Regulation Too Lenient? Evidence from US Offset Markets

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  • Walker, Reed
  • Shapiro, Joseph S

Abstract

We develop a framework to estimate the marginal cost of air pollution regulation and apply it to assess policy efficiency. We exploit a provision of the Clean Air Act that requires new plants to pay incumbent facilities to reduce emissions. This "offset" policy creates hundreds of local pollution markets, differing by pollutant and location. Theory and transaction data suggest that offset prices reveal marginal abatement costs. We compare these prices to marginal benefits of pollution reduction estimated using leading air quality models and find that, on average, marginal benefits exceed marginal costs by more than a factor of ten.
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Suggested Citation

  • Walker, Reed & Shapiro, Joseph S, 2025. "Is Air Pollution Regulation Too Lenient? Evidence from US Offset Markets," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt96x707g2, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt96x707g2
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    Cited by:

    1. Andrew L. Goodkind & Jay S. Coggins & Christopher W. Tessum & Julian D. Marshall, 2025. "Optimal Point Source Abatement Technology Adoption: The Impact of Uncertainty in the Benefits of Abatement," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 88(3), pages 709-730, March.
    2. Abdul-Salam, Yakubu & Kemp, Alex & Phimister, Euan, 2022. "Energy transition in the UKCS – Modelling the effects of carbon emission charges on upstream petroleum operations," Energy Economics, Elsevier, vol. 108(C).
    3. Alvaro Pedraza & Tomas Williams & Federica Zeni, 2026. "Where Firms Retire Carbon Offsets: Operational Footprints and Offset Quality," Working Papers 2026-010, The George Washington University, The Center for Economic Research.
    4. Milsom, L. & Roland, I., 2021. "Minimum wages and the China Syndrome: Causal evidence from US local labor markets," Cambridge Working Papers in Economics 2170, Faculty of Economics, University of Cambridge.
    5. Gong, Binlei & Li, Haoyang & Lin, Liguo & Ling, Hanxiang & Sun, Wei, 2026. "Two birds, one stone: Responses of agriculture to water pollution regulation," Journal of Development Economics, Elsevier, vol. 179(C).
    6. Yingfei Mu & Edward Rubin & Eric Yongchen Zou, 2026. "What's Missing in Environmental Self-Monitoring: Evidence from Strategic Shutdowns of Pollution Monitors," The Review of Economics and Statistics, MIT Press, vol. 108(3), pages 597-612, May.
    7. Raphael Calel & Jonathan Colmer & Antoine Dechezleprêtre & Matthieu Glachant, 2025. "Do Carbon Offsets Offset Carbon?," American Economic Journal: Applied Economics, American Economic Association, vol. 17(1), pages 1-40, January.
    8. Bialek, Sylwia & Gregory, Jack & Revesz, Richard L., 2022. "Still your grandfather's boiler: Estimating the effects of the Clean Air Act's grandfathering provisions," Working Papers 05/2022, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    9. Barbara Annicchiarico & Stefano Carattini & Carolyn Fischer & Garth Heutel, 2022. "Business Cycles and Environmental Policy: A Primer," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 3(1), pages 221-253.
    10. Aldy, Joseph E. & Halem, Zachery M., 2022. "The Evolving Role of Greenhouse Gas Emission Offsets in Combating Climate Change," RFF Working Paper Series 22-17, Resources for the Future.

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    Keywords

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    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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