Assessing the implementation of the reclaim cap -and -trade market for pollution: Measurement issues in counterfactuals, goal attainment, and command -and -control alternatives

The creation of cap-and-trade (CAT) markets for pollution has long been suggested as an alternative to command-and-control (CAC) regulation. Economic theory suggests that CAT markets could achieve similar environmental outcomes to CAC in a more efficient manner. In addition, CAT holds the promise that they may deliver environmental improvements above and beyond CAC. CAT should also spur innovation in abatement technologies and processes. This dissertation uses the Regional Clean Air Incentives Market (RECLAIM) as a critical case study of the effectiveness of cap-and-trade programs. The main focus of this dissertation is in assessing the effects of the RECLAIM program on emissions levels. The main contribution of this dissertation is that it provides critical insight into measurement issues surrounding CAT markets. Most previous assessment efforts have used the level of tradable permits to assess policy effectiveness of emissions reductions. This dissertation argues that permit levels may not truly represent a CAC counterfactual. A better measure might be to compare emissions levels of regulated entities under CAT markets to those of CAC in a similarly situated environment. Using this latter measure this study finds that the RECLAIM program did not lower emissions levels below those found under CAC. Efficiency gains under RECLAIM may also have been overstated. Further, RECLAIM probably did not produce innovation. An implementation framework is adopted to explain why RECLAIM was never a pure example of a CAT market. As the policy has matured it has deviated farther and farther from the CAT ideal. Better measurement standards and more in depth assessments should produce better inferences on the extent to which CAT markets work under real world conditions. As CAT markets are becoming widely diffused, usable knowledge about their potential and limitations is critical.