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Improving Transboundary Air Quality with
Binational Emission Reduction Credit Trading
Imposing limits on emissions per unit of time or per unit of production
can also increase abatement costs. Facilities with high
abatement costs will have to meet the same standards as facilities
with low abatement costs. The result will be that high-cost abatement
projects will have to be undertaken at facilities where meeting
standards are difficult. Moreover, since firms have no incentive to
reduce emissions below the regulatory standard, even when doing so
is a low-cost alternative, some low-cost abatement projects (i.e.,
low-cost projects at facilities already meeting emission standards)
will not be undertaken.
Enforcing air quality standards by restricting the activities of polluters
introduces a potential “free-rider” problem. The facilities
most heavily regulated are the firms most likely to have their activities
restricted should air quality standards not be met. They are also
most likely to have already undertaken aggressive abatement activities.
Facilities operating under fewer regulations, which are thus less
likely to face regulatory action, have less incentive to undertake
abatement projects, yet it is these facilities that contribute most to
the failure of a region to meet pollution standards. This is exactly
the situation facing the Paso del Norte. Regulated U.S. facilities
have faced restrictions on activities while major sources of pollution
continue unabated on the Mexican side of the border (TNRCC
2000). Such an anomaly raises fairness issues.
Of course, regulators are well aware of the drawbacks of command-and-control
regulation. They understand that the blind application
of simplistic rules can result in perverse outcomes. With this
in mind, regulators have developed detailed rules with the hope of
overcoming the limitations of command-and-control. But, this rulemaking
process in and of itself can introduce new inefficiencies. To
the extent that complex rules are difficult to understand and
enforce, they can become burdensome.
The second approach to regulation is the use of corrective taxes
and subsidies. This approach usually involves levying a tax on pollution
emissions, typically on each unit of pollution emitted above
a baseline level. Alternatively, rather than impose a tax, a subsidy
can be paid for each unit of pollution reduction below the baseline.
Corrective taxes and subsidies allow for decentralized decision-making
in that the emitter determines the level of pollution released
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