Tradable Air Pollution Permits in the Overall Regulatory System: Problems of Regulatory Interactions

Because many environmental problems are associated with the production and use of energy, it is not surprising that the effects of policies in the two areas are often interdependent. This paper explores the interactions between the feasibility of an efficient market for emissions permits for sulfur oxides and the current state of air pollution, public utility and natural gas regulation. It shows how some of the opposition to tradable emissions permits can be traced to proposals to implement the reforms that redistribute wealth and the burden of regulatory uncertainty in ways that have greater economic impact than the potential efficiency gains of a market approach. It also examines how a tradable permits market and other regulatory reforms can be designed so as to avoid most of these problems.