Is Air Pollution Regulation Too Lenient? Evidence from US Offset Markets

We develop a framework to estimate the marginal cost of air pollution regulation and apply it to assess policy efficiency. We exploit a provision of the Clean Air Act that requires new plants to pay incumbent facilities to reduce emissions. This “offset” policy creates hundreds of local pollution markets, differing by pollutant and location. Theory and transaction data suggest that offset prices reveal marginal abatement costs. We compare these prices to marginal benefits of pollution reduction estimated using leading air quality models and find that, on average, marginal benefits exceed marginal costs by more than a factor of ten. (JEL D61, H23, K32, Q52, Q53, Q58)