Journal Article

Where are the Sky's Limits? Lessons from Chicago's Cap-and-Trade Program

Mar 21, 2007 | David Evans, Joseph A. Kruger


Economists have long argued that cap-and-trade programs are generally preferable to traditional approaches to regulating pollution. Traditional regulatory methods require regulators to identify which emission controls will be used by each facility, sometimes requiring a costly and time-consuming process for program administrators and the regulated industries. Furthermore, they typically do not take into account differences in the cost of controlling pollution across sources, so abatement does not always occur where it is most cost-effective to reduce pollution. Cap-and-trade programs ensure that abatement occurs where pollution is least costly to control and places significant emphasis on the measurement of emissions and not on the actual method of control. These programs also provide incentives for regulated sources to reveal their actual cost of controlling pollution and adopt innovative technologies. The watershed event that raised the popularity of cap-and-trade programs was the adoption and success of the national program to control sulfur dioxide (SO2) from coal-fired power plants in the United States. The SO2 program, which began in 1995, reduced emissions dramatically and at less cost than traditional methods. Although there is a substantial literature on the U.S. SO2 and nitrogen oxide (NOx) cap-and-trade programs, little attention has been paid to a smaller, less publicized program: the Emissions Reduction Market System (ERMS) for volatile organic materials (VOMs) in Chicago, Illinois.