Do Environmental Markets Improve Allocative Efficiency? Evidence from U.S. Air Pollution
The central appeal of environmental markets – efficient allocation of emission reductions – has been difficult to establish empirically. We develop a framework linking the theoretical change in allocative efficiency following a market-based policy to a quasi-experimental estimator. We apply this framework with administrative data to two major U.S. air pollution markets. We find allocative efficiency for pollution improved by 3.3 percentage points annually under California’s RECLAIM program but do not detect a change under the U.S.’ NOx Budget Trading Program. These results are supported by greater heterogeneity in baseline facility characteristics under RECLAIM and differences in program implementation.
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