NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Regulation of Pollution Sources


There is significant potential for efficiency improvements from coordinating abatement activity across mobile- and point-source pollution types.

For political and practical reasons, environmental regulations sometimes treat point-source polluters, such as power plants, differently from mobile-source polluters, such as vehicles.Meredith Fowlie,Christopher Knittel, and Catherine Wolfram analyze this regulatory asymmetry in the case of nitrogen oxides (NOx), the air pollutant that has proven to be the most resistant to regulatory control in the United States.

In Sacred Cars? Optimal Regulation of Stationary and Non-stationary Pollution Sources (NBER Working Paper No. 14504), they note that large scale, market-based air pollution regulations -- such as the Acid Rain Program and the Nitrogen Oxide (NOx) Budget Program -- have successfully taken advantage of significant gains from trade among large industrial point-sources of pollution. Still, they suggest that there is significant potential for efficiency improvements from coordinating abatement activity across mobile- and point-source pollution types. The authors estimate that the total compliance costs currently incurred are almost 10 percent (or nearly $2 billion) higher than the minimum costs required to achieve the combined reductions mandated by the two programs they study. Specifically, the current regulations require too much reduction from power plants and too little from passenger vehicles.

The authors acknowledge that the cost inefficiency is slightly lower in percentage terms than estimates for intra-sector gains from the adoption of market-based policies. However, because the combined costs of programs across sectors will be larger than the cost of any single program, the efficiency gains in dollar terms are likely to be higher.

There are several reasons why the authors' estimates represent a lower bound on the productive inefficiencies present in regulating NOx. First, there is strong evidence to suggest that other mobile sources, such as on- and off-road diesel, have lower marginal abatement costs than passenger vehicles. Also, their results are based on comparing a market-based program for power plants with a command-and-control standard for motor vehicles. This makes the estimates of the marginal cost of abating NOx emissions from vehicles an upper bound on the true marginal cost if a more market-based approach were adopted. For instance, if regulators were able to pass a "NOx tax" the market might uncover a number of less expensive abatement strategies, such as driving less or retiring old vehicles.

The authors note that their findings are particularly relevant to the ongoing debate over how to design policies to address climate change. There is tremendous pressure on regulators to find ways to keep the economic costs of achieving proposed greenhouse gas reduction targets to a minimum. In theory, an economy-wide tax or cap-and-trade program should ensure that marginal abatement costs are equal across all sources. Several of the proposed pieces of climate change legislation would have point and mobile sources of greenhouse gas emissions regulated under the same market-based regulatory program. Others have argued that the transportation sector, which accounts for 27 percent of total U.S. greenhouse gas emissions, should be regulated separately from large point sources. The authors' findings illustrate the potential for inefficiency when sectors and source types are regulated separately.

-- Lester Picker


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