(This blog is co-authored with Reed Walker).

Offset markets for air pollution don’t worsen environmental inequality, though also don’t improve it.

One of the Biden Administration’s top two environmental priorities, along with climate change, is environmental justice (EJ)—the concern that low-income and minority communities experience higher levels of environmental dangers. These concerns have prompted a search for policies to address such disparities.


Source: Gage Skidmore, wikipedia.org

Market-based environmental policies, including cap-and-trade markets, offset markets, and pollution taxes, have been one of economists’ largest influences on environmental policy. Most economists support market-based environmental policies because they can reduce pollution at lower cost than other policies.

At the same time, skeptics of market-based environmental policies have questioned their implications for equity. For example, the Biden Administration considered appointing former California Air Resources Board director Mary Nichols as EPA Administrator, but it has been reported that pressure from environmental justice groups against her appointment were one reason she was not selected. The Energy Institute has blogged about environmental justice opposition to market based climate policy and air pollution policy previously.


Source: https://en.wikipedia.org/wiki/Chevron_Richmond_Refinery

Our new Energy Institute Working Paper investigates how one of the oldest forms of market-based environmental policy has affected pollution disparities between communities. Since the 1970s, the Clean Air Act has allowed firms to trade permanent rights to emit air pollution within a metro area through air pollution offset markets. When a firm wants to open a large, new industrial pollution source like a factory, it must pay an existing local polluter to permanently reduce its emissions by the same amount it will emit. These transactions, called “offsets” (or legally, Emissions Reductions Credits) have led to the creation of several hundred of these markets (see map below).

Counties Nationally with Offset Markets for NOx and VOCs


Our previous blog post discussed the costs and benefits of these air pollution offset markets and whether existing regulations were too stringent or not stringent enough. In our new paper, we ask whether trades of the permanent right to emit pollution between plants disproportionately impact low income or minority communities.

To undertake this analysis, we study twelve large air pollution offset markets in California and Texas where we observe the facilities that permanently reduced air pollution emissions and the corresponding facilities that bought those emissions rights to increase their own emissions. We observe the locations of plants buying and selling pollution offsets in these markets, which we link to census data on demographics of nearby households.

We find little evidence that pollution trades have disproportionately moved emissions towards or away from low-income and minority communities. We find that neighborhoods where offsets are sold and purchased have similar demographics.

For example, the share of people who identify as Black is similar in communities where offset markets are permanently increasing and decreasing pollution. We also look at the share of households that identify as Hispanic, and at median household incomes, and find similar conclusions—air pollution offset markets are not disproportionately relocating pollution to or from low-income or minority communities.

More broadly, the equity implications of market-based environmental policy depend on the spatial distribution of the costs for plants to generate additional reductions in emissions (“marginal abatement costs”). In environmental markets, emissions reductions disproportionately come from facilities with low marginal abatement costs. If those facilities are polluting low income or minority communities, then market-based mechanisms are more likely to reduce environmental inequality. Thus, it is difficult to extrapolate conclusions from one market to the next. Without information about the spatial distribution of facility-level marginal abatement costs, it is difficult to predict what the implications of environmental markets might be for certain communities.

Offset prices for sellers and buyers provide one potential proxy for facility-level marginal abatement costs. Thus, we can explore how these transaction prices correlate with community characteristics of sellers and buyers in ways that may shed light on the equity implications of future market-based environmental policies in these communities.

Figure 3 below shows a simple correlation between the share of different communities that is Black and the prices at which air pollution offsets are bought or sold. If offset prices were higher for plants in predominantly Black communities, it might suggest that market-based policies would tend to increase emissions in those communities. This is because higher prices suggest it is more expensive for those plants to clean up pollution, and so under a market-based environmental policy, they would clean up less pollution and simply buy more emissions permits.


Figure 3 suggests that offset prices for plants located in predominantly Black communities are similar to offset prices for plants located in primarily non-Black communities. The red dots show no visual pattern, and the linear trend (the blue line) has a slope which is close to zero. Our research finds similar patterns for the share of communities which is Hispanic and for household median incomes. In other words, this market-based environmental policy should not be expected to cut or increase pollution more in Black, Hispanic and low-income communities than in other communities.

Our research finds that the Clean Air Act’s market-based offset program is an effective approach to regulate pollution, but that it does not substantially reduce, or increase, environmental inequality. At the same time, important gaps in pollution exposure remain, and regulators may have reason to look at new tools to address these inequities in the future.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

For more details see Shapiro, Joseph S. and Reed Walker. “Where is Pollution Moving? Environmental Markets and Environmental Justice”, Energy Institute Working Paper 315 at https://haas.berkeley.edu/wp-content/uploads/WP315.pdf.

Suggested citation: Shapiro, Joseph S. and Walker, Reed“Environmental Markets and Environmental Justice” Energy Institute Blog, UC Berkeley, March 29, 2021, https://energyathaas.wordpress.com/2021/03/29/environmental-markets-and-environmental-justice/

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