Determining the cost-effective size of an emission trading region for achieving an ambient standard

Little effort has been devoted to determining the cost-effective trading region for emission permits that achieve an ambient standard. With regional expansion, control by more distant, lower marginal cost sources supplants control by higher marginal cost sources in the original region. However, the impact of more distant source emissions on ambient receptors will typically decline. The aggregate effect on costs of this tradeoff depends crucially on the standard’s stringency. Since a rule-of-thumb for the effect of regional expansion requires overly-restrictive assumptions, we model nitrogen oxide permits subject to nitrogen loading standards for Chesapeake Bay. Regional expansion substantially reduces cost only when the standard is stringent.