Markets and Geography : Designing Marketable Permit Schemes to Control Local and Regional Pollutants

In recent years, there has been a steady rise in the use of marketable permits in environmental regulation. They have been employed as tools to control both air and water pollution, and have been implemented on local, regional, and national scales. These trading regimes - based upon a single market in emission permits - do not control the distribution of emissions throughout the trading region or prevent the formation of "hot spots" of pollution. Over the years, commentators have advocated several alternative design structures to deal with these problems. Each of these alternatives, however, has significant drawbacks, either providing only an incomplete solution to the problem or introducing complexity that could stand in the way of the efficient functioning of the market. In this Article, we propose constructing a market in tradable emission permits under which trading would be entirely unfettered, with the sole exception that a prospective buyer and seller would have to receive approval from a website before they could consummate their trade. The website would use an atmospheric dispersion model to predict the impact of the emissions from all the sources in the region - as modified by the proposed trade - on ambient pollution levels at various receptor points. It would reject any trade resulting in the violation of an applicable ambient standard. We discuss how such a regime would deal with variable - as opposed to uniform - ambient standards throughout the region; auctions of permits, either at the time of the initial distribution or subsequently; and purchases of permits with the intent to bank them for use at a future time, retire them in order to improve environmental quality, or hold them as an investment with the goal of reselling them in the future