Economics of the enviroment 3 pages paper to answer this question!!!!!
CAA 1990 portion
It has been widely theorized that market based policies are superior to direct regulatory policies because they are more cost effective, as well as offering an incentive for firms to innovate. With the amendments to the Clean Air Act in 1990 the policy changed from a direct regulatory policy to a market based approach. While the 1990 amendments maintained the set level of allowable emissions produced from the previous version of the Clean Air Act, the new amendments did not mandate how such levels should be achieved (Popp 2003). Because there are no set mandates on how a firm should control emissions, firms are free to pursue the most cost-effective way to reduce emissions. Ellerman and colleagues (1997) have estimated that 45.1% of reductions in 1995 came from sulfur dioxide scrubbing, while the remaining 54.9% can be traced back to firms switching to cleaner fuels, such as low-sulfur coal (Popp 2003). While this version of the Clean Air Act has achieved impressive results, it has not been without bumps along the way.
In Popp (2003) a regression analysis shows a lack of innovative activity after the 1990 implementation. Using scrubber technology patenting activity as a defined variable for innovation, there was no statistically significant change after 1990 (Popp 2003). However, Popp offers several explanations for why this might be the case. Firstly, Popp notes that the data might be biased and that when the factory survey was issued, not enough time had passed for the tradeable permit market to have reached an equilibrium (Popp 2003). Additionally, Popp also theorizes that the permit prices were much lower than initially predicted. With permit prices too low, firms would not have an adequate enough incentive to research and develop scrubbing technology. However in Bellas (2005), he finds that innovation does significantly increase after the implementation of the 1990 Clean Air Act.
In Bellas (2005) he finds that both real operating costs and capital costs of installing scrubbers discretely fell after the 1990 amendments of the Clean Air Act. The Author credits this change in scrubbing technology to incentive to innovate that market based policies provide. By allowing for firms to personally decide how to abate, firms are able to select the cheapest way of abating. For example, factories operating in the northeast face significantly higher capital costs and operating costs, and factories in the west face significantly higher capital costs than firms operating in the Midwest, which was used as a control in the regression (Bellas 2005). Therefore firms facing different marginal costs are able to select the abatement option that is most effective for them. Further, Bellas finds that in his regression that scrubbers installed under the 1990 Clean Air Act amendments are cheaper to purchase and cheaper to operate (Bellas 2005). However, Bellas in his conclusion states that a confounder of these results could be a possible change in organization of the scrubber market. If market concentration decreases, or costs to firms selling scrubbers decreases then it is expected that prices of scrubbers would fall (Bellas 2005). An additional way of analyzing the effects of the 1990 amendments of the Clean Air Act is examining the macroeconomic effects of the policy.
In Jorgenson et al. (1993) the authors examine how environmental policy affects gross national product growth over time. In this article , two different regressions were constructed to model GDP growth over time, using the lack of policy as a control. In this model the components for GDP were broken up and analyzed into their subgroups of consumption, investment, government spending and foreign trade (Jorgenson et al 1993). To capture the differences among households consumption variables such as family size, age of head of household, region of residence, race, and urban or rural were included (Jorgensen et al. 1993). By treating each household as a consuming unit, households behave like individuals maximizing a utility function (Jorgensen et al 1993). Further, government spending has been econometrically analyzed and attempted to be mimicked (Jorgensen et al. 1993). However, when this article was originally published in 1993 the authors did predict a gradual decrease in the deficit, which has historically not been the case. Lastly the authors assumed that investors would have perfect foresight or rational expectations of interest rates and inflammation (Jorgensen et al 1993). This means that people expect inflation and interest rates to be at the level that the Federal Reserve sets them at from time period to time period. The authors found that with the environmental protection policy there is a 1.290% rise in the GDP in the steady state, which is nearly twice as much as in the absence of a policy implementation (Jorgensen et al 1993). Further, the exchange rate is expected to appreciate by 0.462% which indicates an increase in international competitiveness in the U.S. economy (Jorgensen et al 1993).