Do Environmental Markets Improve Allocative Efficiency? Evidence from U.S. Air Pollution

Kyle Meng and Vincent Thivierge

No 34111, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The central appeal of environmental markets – efficient allocation of emission reductions – has been difficult to establish empirically. We develop a framework linking the theoretical change in allocative efficiency following a market-based policy to a quasi-experimental estimator. We apply this framework with administrative data to two major U.S. air pollution markets. We find allocative efficiency for pollution improved by 3.3 percentage points annually under California’s RECLAIM program but do not detect a change under the U.S.’ NOₓ Budget Trading Program. These results are supported by greater heterogeneity in baseline facility characteristics under RECLAIM and differences in program implementation.

JEL-codes: D61 Q50 Q52 Q53 Q58 (search for similar items in EconPapers)
Date: 2025-08
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