can cause serious health hazards. The main purpose of this exercise is to assess the
potential savings associated with implementing economic, rather than current
regulatory approaches to abate SPM in a local airshed. Specifically we examine the
costs of meeting the target emission standard for SPM for stationery sources of SPM in
a steel plant, under the current regulatory system and the system of emissions trading
among the emission sources under the common ownership, using the bubble concept.2
The paper concludes by drawing out some of the policy implications of this analysis.
2. The Analytical Model
What constitutes an emission trading system depends on the attributes of
pollutants being controlled. To be consistent with the cost effectiveness objective of the
emission control policy, different trading schemes would be required for different types
of pollutants. For instance, for pollutants that are uniformly mixed in the atmosphere,
trading between two emission sources can take place on a one-to-one basis, as a unit
emission of pollutant from any discharge point in an airshed would contribute to
ambient air quality in the same manner. That is, in the case of uniformly mixed
pollutants, the ambient concentration of the pollutant depends on the total amount of
pollutant discharged, but not on the location of discharge points. Thus a unit reduction
in emission from any source within an airshed would have the same effect on the
ambient air quality. However, the instrument design is somewhat different when
pollutants are not uniformly mixed in the atmosphere such as the SPM, which as noted
earlier is also the focus of this study. In the case of SPM, trading cannot be on one-to-
See Bohm and Russell (1985), Baumol and Oates (1988), and Montgomery (1972).
The bubble concept allows various polluters in a geographical area - with varying abatement
costs - to jointly abate a predetermined quantity of pollutants. See Atkinson and Tietenberg (1982).
vi
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