Is Air Pollution Regulation Too Lenient? Evidence from US Offset Markets
June 2023
Working Paper Number:
CES-23-27R
Abstract
This paper describes a framework to estimate the marginal cost of air pollution regulation, then applies it to assess whether a large set of existing U.S. air pollution regulations have marginal benefits exceeding their marginal costs. The approach utilizes an important yet under-explored provision of the Clean Air Act requiring new or expanding plants to pay incumbents in the same or neighboring counties to reduce their pollution emissions. These "offset" regulations create several hundred decentralized, local markets for pollution that differ by pollutant and location. Economic theory and empirical tests suggest these market prices reveal information about the marginal cost of abatement for new or expanding firms. We compare estimates of the marginal benefit of abatement from leading air quality models to offset prices. We find that, for most regions and pollutants, the marginal benefits of pollution abatement exceed mean offset prices more than ten-fold. In at least one market, however, estimated marginal benefits are below offset prices.
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demand,
market,
economist,
cost,
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expenditure,
valuation,
regulation,
regulatory,
emission,
pollution,
epa,
pollution regulation,
environmental,
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costs pollution,
pollution abatement,
polluting industries,
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National Bureau of Economic Research,
Environmental Protection Agency,
Michigan Institute for Teaching and Research in Economics,
National Ambient Air Quality Standards,
UC Berkeley,
Census Bureau Disclosure Review Board,
Disclosure Review Board,
Federal Statistical Research Data Center
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