Cost-Effective Policies to Improve Urban Air Quality in Santiago, Chile

This paper examines the applicability of market-based incentives for controlling emissions of particulate matter from fixed sources, in a developing-country context. It uses Santiago, Chile as a case study. A linear programming model has been developed to establish the costs of achieving different air quality targets using marketable permits and command-and-control (CAC) policies. The main conclusion is that an ambient permit system (APS) substantially reduces compliance costs of achieving a given air quality target at each receptor location in the city. Consequently, the use of permits is warranted. However, spatial differentiation of permits is required, thus complicating the design and use of such an instrument. Moreover, the reduction in compliance costs under APS is significantly less when the air quality targets imposed for each receptor location are the same as those achieved by other CAC policies.