the power to block implementation, while potential future users do not. This has made it politically expedient to allocate a substantial part of the economic rent that these resources offer to existing users as the price of securing their support. Although this strategy reduces the adjustment costs to existing users, it generally raises them for new users.46

The design features of the programs are not stable over time; they evolve with experience. The earliest use of the tradable permit concept, the Emissions Trading Program, overlaid credit trading on an existing regulatory regime and was designed to facilitate implementation of that program. Trading baselines were determined on the basis of previously determined, technology-based standards and created credits could not be used to satisfy all of these standards. For some the requisite technology had to be installed.

More recent programs, such as the Acid Rain and RECLAIM programs, replace, rather than complement, traditional regulation. Allowance allocations for these programs were not based on preexisting technology-based standards. In the case of RECLAIM, the control authority (the South Coast Air Quality Management District) could not have based allowances on predetermined standards even if it had been inclined to do so. Defining a complete set of technologies that offered the necessary environmental improvement (and yet were feasible in both an economic and engineering sense) proved impossible. Traditional regulation was incapable of providing the degree of reduction required by the Clean Air Act.

Environmental Effects

One common belief about tradable permit programs is that their environmental effects are determined purely by the imposition of the aggregate limit, an act that is considered to lie outside the system. Hence, it is believed, the main purpose of the system is to protect the economic value of the resource, not the resource itself.

That is an oversimplification for several reasons. First, whether it is politically possible to set an aggregate limit may be a function of the policy used to achieve it. Second, both the magnitude of that limit and its evolution over time may be related to the policy. Third, the choice of policy regime may affect the level of monitoring and enforcement and noncompliance can undermine the achievements of the limit. Fourth, the policy may trigger environmental effects that are not covered by the limit.

The demonstration that the traditional regulatory policy was not value maximizing had two mirror-image implications. It implied either that the same environmental goals could be achieved at lower cost or that better environmental quality could be achieved at the same cost. In air pollution control, although the earlier programs were designed to exploit the first implication, later programs attempted to produce better air quality and lower cost.47

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