Energy Institute at Haas

We study the benefits, abatement costs, and distributional outcomes of the EPA’s NOx Budget Program, a seasonal cap-and-trade market for NOx emissions. Using a new empirical approach, we recover source-specific marginal abatement cost curves and combine them with source-specific air pollution damages to quantify market outcomes. We find that abatement costs under the market are roughly one-sixth those of an abatement-equivalent non-market policy. Despite these large differences in aggregate costs, the market and the non-market policy yield similar air quality benefits, both in overall magnitude and across demographic groups. We show that these results reflect the weak correlation between source-specific marginal damages and abatement behavior.