Is Air Pollution Regulation Too Stringent?

If you are interested in joining the seminar, please send an email to Daniel Haerle or Sacha den Nijs.

Authors: Joseph S. Shapiro, Reed Walker

Abstract:
This paper describes a new approach to estimating the marginal cost of air pollution regulation, then applies it to assess whether a large set of existing U.S. air pollution regulations are too stringent or lenient. The approach utilizes an important yet underexplored 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 hundreds of decentralized, local markets for pollution that differ by pollutant and location. We show how offset transaction prices can be interpreted as measures of the marginal cost of abatement, and we compare them to estimates of the marginal benefit of abatement from leading air quality models. We find that for most regions and pollutants, regulation is too lenient; marginal abatement costs are persistently and substantially below marginal abatement benefits. In at least one market, however, regulation is too stringent—the marginal costs of abatement significantly exceed the marginal benefits of abatement. Marginal abatement costs have increased in real terms by over 6 percent annually. Notably, our revealed preference estimates of marginal abatement costs differ enormously from typical engineering estimates. Theory and evidence suggest that using price rather than existing quantity regulation in these markets could increase social welfare.