Damage assessment

Abstract

Nicholas Z. Muller discusses how environmental policies need to recognize that the harms from emissions of many air pollutants depend on where they are released. A key feature of current cap-and-trade programs is that regulated firms trade allowances on a ton-for-ton basis. Trading based strictly on tonnage assumes that the value to society of emissions is equal. Alternatively, trading regimes, which have traditionally charged one price for permits purchased by all regulated facilities, can also be designed to reflect damages that vary by source. Although these policies are intuitively very appealing, one clear impediment to their design and implementation is information. Regulators have historically lacked data on the damages caused by emissions from specific sources. A second plausible argument against this policy design is uncertainty in the damage estimates. It is correct to posit that the damage estimates reported herein are uncertain.