Watson Institute for International and Public Affairs

The Clean Air Act's Use of Market Mechanisms

May 14, 2019

Eric Patashnik

Eric Patashnik authored a chapter, "The Clean Air Act's Use of Market Mechanisms," which was published in Lessons from the Clean Air Act (co-edited by Ann Carlson and Dallas Burtraw, Cambridge University Press, 2019).

When policymakers address the problem of pollution, they can choose among a variety of policy mechanisms or tools. Over the past thirty years, there has been growing interest in the use of market-based environmental policy instruments. Economists have long favored such tools over traditional command-and-control regulations on the grounds of (1) cost-effectiveness and (2) dynamic incentives for innovation and the diffusion of new technologies. 

The success of market-based environmental policies is not guaranteed, however. Like all policy tools, market-based policies are subject to the vagaries of the implementation process, and even mature environmental markets require government involvement to manage three key challenges: political durability (whether market-based policies can outlast their original enacting coalitions), policy durability (whether the policies can survive long enough to achieve their original environmental goals) and adaptability (whether the policies can assimilate new economic and scientific information and changing conditions). These three challenges are implicated in the various roles that government plays once environmental markets are established, including setting emission caps, distributing allowances and ensuring the durability and adaptability of the policy by working to build constituencies and update policies over time for evolving circumstances.

How have market-based environmental policies actually performed in the United States? Have they produced acceptable environmental outcomes at reasonable cost? What factors have influenced their durability, flexibility, adaptability and environmental effectiveness? To address these questions, this chapter examines the experiences of three market-based policies contained in the Clean Air Act (CAA): the leaded gas phase-down, the sulfur dioxide allowance trading program, and the nitrogen oxide interstate emission trading program. The chapter argues that, on the whole, the track records of the three programs demonstrate that market-based solutions can indeed endure long enough to achieve ambitious environmental improvement goals at reasonable cost. But there is nothing inevitable or permanent about these policy success stories. Even well-designed market-based programs may encounter adaptability challenges that lead to suboptimal outcomes over time.

To learn more about the book, click here.