The Chicago VOC trading system : the consequences of market design for performance

The Chicago cap-and-trade approach to regulating stationary source VOC emissions in the Chicago ozone non-attainment area is a pioneering program that could set a precedent for other urban areas troubled by high ozone concentrations. It holds out the promise of cost-effectiveness, innovation stimulation, and flexibility compared with traditional regulation. To appraise this program design and evaluate these objectives, this study analyzes four years of data since the inception of the program in 2000. The data reveal that while emissions are far below the cap, there are unexpectedly large banks, startling expirations, and low prices of tradable permits, all inconsistent with an effective market. We find that the market as designed has been constrained from reaching its objectives by the continuance and extension of an underlying layer of traditional regulation, and to a lesser extent by over-allotment of tradable permits. That is, traditional regulation and over-allotment, combined with a market design calling for a small reduction in emissions from baseline and a one-year limit on banking, explain the incongruous outcomes recorded in the market.(cont.) This study explores the evolution of this particular market design and presents statistical evidence in support of the hypothesis that the performance of a cap-and-trade market is very sensitive to design features when combined with other regulatory measures. The study concludes that the market as presently designed falls far short of achieving cost effectiveness, innovation stimulation, and flexibility. The policy recommendations include that the cap be significantly tightened, perhaps in a series of steps, and the banking horizon be extended to three years or more. Such redesign should enable the cap-and-trade approach to assume its proper role in helping to achieve the new eight-hour standard for ozone concentrations

Cost effective control of urban smog. A report of a conference held at the Federal Reserve Bank of Chicago, June 7-8, 1993

Environmental protection

Forecasting public education expenditures

Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/45969/1/10110_2005_Article_BF01943207.pd

Regulatory conflict in the Chicago VOC control program

The study analyzes the performance of an innovative cap-and-trade program designed to make cost-effective reductions of an ozone precursor in Chicago and finds that decentralized market incentives were undermined by the continuance of centralized traditional emission point or command-and-control regulation. The study makes two contributions for urban areas considering this regulatory measure: it shows that using two regulatory measures to achieve one emissions reduction goal can undercut cost-effective emissions trading, and it provides a redesign of the market system that coordinates both regulatory measures for cost-effective control and avoidance of trading problems, such as hot spots and inter-temporal spikes.ozone, cap-and-trade, command-and-control, regulatory coordination, cost-effectiveness, VOC redesign,

Tradable Cumulative CO2 Permits and Global Warming Control

As an alternative to current global warming policy proposals to freeze greenhouse gas 'emissions' at their 1990 levels by the year 2000, this study examines the implications of a long-run objective of stabilizing greenhouse gas "concentrations" at low to moderate risk levels by the year 2100. The current proposals to control emissions slow but do not end the build-up of concentrations, and they could imply costly short-term adjustments of the energy industries. Our objective is to explore an alternative policy that could (1) stabilize induced climate change, (2) provide for the creation of international "property rights" in the stratosphere by means of tradable emission permits, and (3) be more intertemporally cost-effective. Our method for analyzing this effort is a tested, dynamic, price sensitive, global economic model to which is linked a climate change submodel. Together these models enable us to project price and quantity time paths of energy, climate, and tradable permit variables under alternative policy actions.