Gains from Trade in the Optimal Control of Environmental Externalities: Evidence from Acid Rain Abatement in the Eastern United States and Canada

Abstract

In this paper I investigate the properties of a system of internationally traded "licenses to pollute" for the control of acid rain in the Eastern United States and Canada. I report estimates of the costs to the United States and Canada of achieving a 15 percent reduction in acid rain concentrations under a joint tradeable permit system for sulfur dioxide emissions. I use point-source data for the 200 largest sulfur dioxide emitters in each of Canada and the United States, transfer coefficients that relate emissions in different regions to acid rain concentrations in specified "sensitive receptor" regions, and fitted cost functions for each point source, to estimate the costs facing each country under different acid rain abatement programs. The estimates show (1) that an autarkic program of abatement in either country induces significant spillover benefits in the other that lead to the potential for "freeriding," and (2) that, contrary to widespread beliefs, a joint program of abatement would lead to substantial cost savings for both the United States and Canada. The results also document, however, large differentials in the gains that would accrue to each country, suggesting that there may be serious obstacles, in the form of difficulties in arriving at a division of the gains from trade, to achieving agreement on a joint program of abatement.