“No fences make bad neighbors” but markets make better ones: cap-and-trade reduces cross-border SO2 in a natural experiment

Abstract

The clean air interstate rule (CAIR) was a regional cap-and-trade program announced in 2005 which covered 27 eastern US states and sought to reduce sulfur dioxide emissions from coal-fired power plants. The rule was later vacated after a court found that the non-targeted design of the program did not comply with the Clean Air Act provision to regulate interstate air pollution. Using a custom air pollution dispersion model, I calculate the interstate SO2 pollution from 493 coal-fired power plants across the United States between 1997 and 2020. In a difference-in-differences setup with plants not covered by CAIR in the control group, I estimate the treatment effect of the program on overall- and cross-border SO2 emissions and find a 24% reduction in overall emissions and reduces the risk that a plant violates air quality standards across state borders by 2–4%. I report evidence of heterogeneous treatment effects where the reduction in overall emissions attributed to CAIR is lower among plants transporting SO2 in excess of 1% of the National Air Quality Standards to another state.