Is Air Pollution Regulation Too Stringent?

61 Pages Posted: 19 Jan 2021 Last revised: 21 Jul 2021

See all articles by Joseph S. Shapiro

Joseph S. Shapiro

University of California, Berkeley; National Bureau of Economic Research (NBER)

Reed Walker

University of California, Berkeley - Haas School of Business

Date Written: December 2020

Abstract

This paper describes a novel 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 have marginal costs exceeding their marginal benefits. 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 several hundred decentralized, local markets for pollution that differ by pollutant and location. We describe conditions under which offset transaction prices can be interpreted as measures of the marginal cost of pollution abatement, and 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. Marginal abatement costs are increasing rapidly in real terms. Notably, our revealed preference estimates of marginal abatement costs differ enormously from typical engineering estimates. Some evidence suggests that using price rather than existing quantity regulation in these markets may increase social welfare.

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Suggested Citation

Shapiro, Joseph S. and Walker, Reed, Is Air Pollution Regulation Too Stringent? (December 2020). NBER Working Paper No. w28199, Available at SSRN: https://ssrn.com/abstract=3768251

Joseph S. Shapiro (Contact Author)

University of California, Berkeley ( email )

HOME PAGE: http://joseph-s-shapiro.com

National Bureau of Economic Research (NBER) ( email )

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Reed Walker

University of California, Berkeley - Haas School of Business ( email )

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Berkeley, CA 94720
United States

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