NCPA - National Center for Policy Analysis


May 11, 2009

For political and practical reasons, environmental regulations sometimes treat point-source polluters, such as power plants, differently from mobile-source polluters, such as vehicles.  The National Bureau of Economic Research analyzes 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.

Researchers 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.  They 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 studied.  

Moreover, they acknowledge that the cost inefficiency is slightly lower in percentage terms than estimates for intra-sector gains from the adoption of market-based policies. And there are several reasons why the 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.

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.

Source: Lester Picker, "Regulation of Pollution Sources," NBER Digest, April 2009; based upon: Meredith Fowlie, Christopher R. Knittel, and Catherine Wolfram, "Sacred Cars? Optimal Regulation of Stationary and Non-stationary Pollution Sources," National Bureau of Economic Research, Working Paper, No. 14504, November 2008

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