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Introduction
installing scrubbers, switching fuels, changing practices or procedures
to improve energy efficiency, and/or buying allowances
(EPA 2002a). The program’s flexibility also significantly
reduced the cost of achieving these emission reductions when
compared to the cost of a technological mandate or fixed emission
rate. Carlson, et al. (2000) estimated that SO 2 trading
reduced total abatement costs by $700 million to $800 million
per year when compared to command-and-control, all at an
overall advantage to the environment.
1 See, for example, Burtraw 1996; Burtraw, et al. 1998; Ellerman, et al. 2000;
Ellerman and Montero 1998; Fullerton, et al. 1997; Kruger and Dean 1997;
Rose 1997; and Swift 2000.
public good by private interests. However, this argument is somewhat
misguided because it assumes that the pollution would not
occur in the absence of emissions trading. The issue is not whether
or not to pollute, but rather how to meet existing air quality standards
at the lowest cost. The flexibility of emissions trading allows
standards to be met at a lower cost. Moreover, great care has been
taken in the design of emissions trading programs to ensure that
they result in a net decrease in emissions, and that trading actually
results in better air quality than would be the case in the absence of
it. Considerable care has been directed, for example, at ensuring
that no localized high-emission areas, so called “hot spots,” are created
through emissions trading. This means, at a minimum, that the
offset must come from a source located in the same airshed as the
acquirer.
Emissions trading is particularly well-suited for policy coordination
on the border. Approximately 70% of the border population is
located in 14 twin cities (Peach and Williams 2000). The spatial
proximity of much of the population means that many of the twin
cities form common airsheds, where sources on one side of the border
affect air quality on the other side. Moreover, because of the
unique nature of the border, the decentralized nature of decisionmaking
under emissions trading is particularly important. The com-
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