Transaction Costs and Tradable Permit Markets: The United States Lead Phasedown

What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading

“…To do this, I consider the demand for environmental policy instruments by individuals, firms, and interest groups, and their supply by the legislature and regulatory agencies. This ''political market'' framework is developed by Keohane, Revesz and Stavins (1997).…”

“…First, many legislators and their staffs are trained in law, which predisposes them to favor legalistic regulatory approaches. Second, standards tend to help hide the costs of pollution control (McCubbins and Sullivan, 1984), while market-based instruments generally impose those costs more directly. Compare, for example, the tone of public debates associated with proposed increases in gasoline taxes with those regarding commensurate increases in the stringency of the Corporate Average Fuel Economy standards for new cars.…”

“…As one recent example of this pattern (albeit from the executive rather than the legislative branch), the Clinton administration announced with much fanfare in June 1997 that it would tighten regulations of particulates and ambient ozone, but the new requirements do not take effect for eight years! Congress has frequently prescribed administrative rules and procedures to protect intended beneficiaries of legislation by constraining the scope of executive intervention (McCubbins, Noll and Weingast, 1987). Such stacking of the deck is more likely to be successful in the context of command-and-control legislation, since market-based instruments leave the allocation of costs and benefits up to the market, treating polluters identically.…”

Environmental Law and Policy

“…Although the benefits of the trading scheme are more difficult to assess, the level of trading activity and the rate at which refiners reduced their production of leaded gasoline suggest that the program was relatively cost-effective (Kerr and Maré 1997;Nichols 1997). The high level of trading among firms far surpassed levels observed in earlier environmental markets.…”

Lessons from the American Experiment with Market-Based Environmental Policies

“…For example, allowing flexible timing and intertemporal trading of permits -that is, banking allowances for future useplayed an important role in the SO 2 allowance trading program's performance (Ellerman et al 1997), much as it did in the U.S. lead rights trading program a decade earlier (Kerr and Maré 1997). One of the most significant benefits of using market-based instruments is simply that technology standards are thereby avoided.…”