Capping Emissions: How Low Should We Go?

Investigating where environmental efficiency and good public policy intersect.

More than a decade after adopting the first national cap-and-trade approach to regulating pollution from electricity generators, Congress is considering another round of cap-and-trade regulations on a number of gases emitted by electricity generators. Three bills were introduced into the 107th Congress-and are expected to be reintroduced in a similar form in next year's 108th Congress-that propose dramatic reductions in emissions of sulfur dioxide (SO₂), nitrogen oxides (NO_x), and mercury from the electricity sector. In addition, several states already have adopted limits on emissions of multiple pollutants from electricity generators, and others are considering doing so.

A central question in designing multi-pollutant regulation is at what level to set the emission caps. Economists define the efficient level of an emission cap as that at which the incremental benefit of another ton of emission reduction equals the incremental cost of obtaining that reduction. In this article, we describe the results of our analysis of the efficient levels for NO_x and SO₂ based on health science and economics. We discuss the geographic distribution of the likely air quality improvements, and likewise the consequences for electricity producers and customers. We also use insights from this analysis to evaluate, indirectly, all three legislative proposals introduced in the 107th Congress.