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Abstract

After much debate and many legislative proposals, the Clean Air Act was amended in 1990 to allow more flexibility in meeting emissions standards for SO2. Specifically, an SO2 emissions allowance trading program was implemented. Firms can meet emission standards by any pollution control method, including buying emission allowances from other firms. Analysts have concluded that, with the changes in the Clean Air Act, SO2 emissions have been reduced by 50 percent and at an estimated $7 billion less than the anticipated cost of the regulatory command-and-control system. Not surprisingly, policy analysts have explored the opportunities for implementing similar market-based systems for water pollution control. Because much of the on-going impairment of surface water has been attributed to nonpoint sources of pollution, trading programs which incorporate both point and nonpoint discharges are of particular interest. However, despite as many as six efforts across the nation to implement point-nonpoint effluent credit trading programs to reduce nutrient discharges to water, there have been few trades to date. This research was undertaken to answer the following question: Do current barriers to effluent credit trading programs arise because of fundamental differences between air and water media or because of differences between institutions affecting air and water use, such as the Clean Air Act and the Clean Water Act? Economic theory offers the situation, structure, conduct, and performance (SSCP) framework, developed by industrial organization economists and extended by institutional and environmental economists, within which to address this research question. In the language of the SSCP framework, the research question can be reframed as: are there fundamental differences in the situation and structure of emission allowance markets and effluent credit markets which result in conduct and performance differences? A comparative analysis of situation and structure suggests that barriers to effective nutrient discharge credit markets are not a result of fundamental differences in the air and water media or the materials being discharged into air and water. Rather, the barriers exist because of structural differences - differences in institutional structure, program design and program implementation. Many of the structural barriers result from the Clean Water Act and its implementation. More flexibility in water pollution prevention would effectively remove many of these barriers.

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