The Feasibility of Marketable Emissions Permits in the United States

Economists have long advocated the use of economic incentives, rather than detailed regulations, as a means for combatting environmental pollution. In the late 1970s, environmental regulators in the United States began experimenting with one such method—emissions permits that, within important limits, can be traded among sources of pollution. This paper explores the feasibility of an extreme version of the marketable permits approach, one in which all source-specific regulations are replaced with tradable emissions permits. First, the general argument for a marketable permits system is presented, including a discussion of the legal procedures that are required by each of the major alternative methods for effecting improvements in environmental quality. Then, the implementation problems of a permits market are explored. Because this is partly an empirical problem, this analysis is presented in the context of an example: particulate sulfates in the Los Angeles atmosphere. Finally, some specific design possibilities are presented, and compared to the early experiments with tradable permits