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Reducing nitrogen oxide (NO_x) emissions in the eastern United States has become the focus of efforts to meet ozone air quality goals and will be useful for reducing particulate matter (PM) concentrations in the future. This paper addresses many aspects of the debate over the appropriate approach for obtaining reductions in NO_x emissions from point sources beyond those called for in the Clean Air Act Amendments of 1990. Data on NO_x control technologies and their associated costs, spatial models linking NO_x emissions and air quality, and benefit estimates of the health effects of changes in ozone and PM concentrations are combined to allow an analysis of alternative policies in thirteen states in the eastern United States. The first part of the study examines the cost and other consequences of a command-and-control approach embodied in the Environmental Protection Agency’s (EPA) NO_x SIP call, which envisions large reductions in NO_x from electric utilities and other point sources. These results are compared to the alternative policy of ton-for-ton NO_x emissions trading, similar to that proposed by the EPA for utilities. We find that emission reduction targets can be met at roughly 50% cost savings under a trading program when there are no transaction costs.

The paper examines a number of alternative economic incentive policies that have the potential to improve upon the utility NO_x trading plan proposed by EPA, including incorporation of other point sources in the trading program, incorporation of ancillary PM benefits to ozone reductions in the trading program, and trading on the basis of ozone exposures that incorporates the spatial impact of emissions on ozone levels. For the latter analysis, we examine spatially differentiated permit systems for reducing ozone exposures under different and uncertain meteorological conditions, including an empirical analysis of the trade-off between the reliability (or degree of certainty) of meeting ozone exposure reduction targets and the cost of NO_x control. Finally, several policies that combine costs and health benefits from both ozone and PM reductions are compared to command-and-control and single-pollutant trading policies. The first of these is a full multipollutant trading system that achieves a health benefit goal, with the interpollutant trading ratios governed by the ratio of unit health benefits of ozone and PM. Then, a model that maximizes aggregate benefits from both ozone and PM exposure reductions net of the costs of NO_x controls is estimated.

EPA’s program appears to be reasonably cost-effective compared to all of the other more complex trading programs we examined. It may even be considered an optimal policy that maximizes net aggregate benefits if the high estimate of benefits is used in which mortality risk is linked to ozone exposure. Without this controversial assumption, however, we find that EPA’s NO_x reduction target is far too large.