Trading Equity for Efficiency in Environmental Protection? Environmental Justice Effects from the SO 2 Allowance Trading Program *

Objective. Arthur Okun made plain the fundamental conflict between efficiency and equity that arises in the pursuit of policy goals (Okun, 1974). Although Okun was speaking about government tax and spending policy, the potential conflict between efficiency and equity is also manifest at the nexus of two of the most far‐reaching changes in the environmental policy arena: the adoption of market‐like tools for pollution control and the quest for environmental justice. The article assesses this potential tradeoff by determining whether the pursuit of efficiency through the Clean Air Act Amendment's (CAA) sulfur dioxide allowance trading program (ATP) inadvertently transfers pollution into poor and minority communities. Methods. I employ Probit, Tobit, and GLS models using data for all SO 2 trading activity between January 1995 and March 2009 to estimate whether allowance trading concentrates SO 2 emissions in poor communities and communities of color. When using these models, I control for sample selectivity and for possible bias stemming from the modifiable areal unit problem. Results. The ATP does not concentrate sulfur dioxide emissions in black or Hispanic communities. To the contrary, communities with high percentages of black and Hispanic residents experience fewer imports of sulfur dioxide. Allowance trading does transfer SO 2 emissions into poorly educated communities. Conclusions. There is no inherent tradeoff between efficiency and equity when using market‐based instruments for pollution control. Policymakers, however, might make an effort to design and implement future emissions trading programs in a manner that reduces the monitoring costs of tracking emissions trading. By reducing monitoring costs, policymakers may prevent the concentration of emissions in poorly educated communities while preserving the efficiency benefits of these instruments.