Detecting Impact of Allowance Trading Behaviors on Distribution of Nox Emission Reductions : Evidence from the Clean Air Interstate Rule (Cair)

Cap-and-trade has been promoted by economists due to its cost-effectiveness. However, cap-and-trade could also introduce the risk of environmental inequality by creating pollution concentrations in areas where emitting facilities purchase many allowances. To investigate this concern, I collect facility-year level NOx emissions and allowance transaction data from the Clean Air Interstate Rule (CAIR), a cap-and-trade program targeting on the power sector in the east US. Using a differences-in-differences with instrumental variable approach, I identify the causal effect of allowance purchase on emissions reduction. Results indicate that buyers under CAIR were even able to achieve about 30% of emissions reduction compared with non-participants. I therefore conclude that there is little evidence of environmental inequality from trading activities under CAIR