Depending on pollutant mobility, air pollution may be local (factory odors, smoke), regional (acid rain) or even global (greenhouse gas build-up, ozone depletion by CFC's). Obviously localized problems are easier to deal with than larger-scale problems.

Under the Clean Air Act Amendments of 1970, the EPA assumed principal authority from the states for controlling air pollution, and adopted the usual "command-and-control" (CAC) regulatory approach. The EPA distinguished conventional from hazardous pollutants. It defined uniform ambient air quality standards for each conventional pollutant (short- and long-term averages).

All conventional air pollutants have primary standards designed to protect human health; some also have secondary standards to protect aesthetics, vegetation, etc. The stricter standard applies. These standards were defined by the EPA without regard to cost of compliance. Enforcing these standards was left to the state governments. Not surprisingly, many states missed the federal deadlines for achieving primary standards. Areas out of compliance with these standards were designated as non-attainment areas.

States are required to file State Implementation Plans (SIP's) with the EPA. The EPA is authorized to deny federal sewage and transportation funds for states that don't file SIP's. (New Castle County is still a non-attainment area, and Delaware has been so delinquent in filing its revised SIP that its federal highway funds are currently being withheld.) All major new or modified pollution sources in non-attainment areas must achieve lowest achievable emissions rates (LAER) regardless of cost or control practices at other sources.

The EPA's prevention of significant deterioration (PSD) policies are intended to keep regions with high air quality from letting their air quality deteriorate toward the primary standards. PSD regions are designated as Class I, II or III depending on allowable deterioration.

The EPA's air quality standards are clearly inefficient. Most are based on poorly-documented health thresholds and target zero adverse health effects. They confuse ambient concentrations with actual human exposures. Costs of compliance are explicitly excluded from consideration. Uniform standards ignore critical locational differences and time factors. Even if the chosen standards were efficient, the CAC approach is still not cost-effective. The divergence between CAC and least-cost compliance is particularly high for standards of intermediate toughness.

Emissions trading policies can provide substantial efficiency gains. A system of emission reduction credits allows firms achieving more than the required level of control to either bank or sell credits for emissions reductions. Offset policies require new sources to offset their emissions by acquiring emission reduction credits from existing sources. Bubble policies define standards for multi-firm areas which can be satisfied by actual emission reductions and/or acquisition of emission credits. Netting policies treat individual firms as bubbles, so that emissions increases from one process can be offset by emissions reductions in other processes within the same firm.

Emissions trades are becoming increasingly common although they generally involve high transactions costs because they must be approved by regulators. Recent revisions to the Clean Air Act include formalization of a sulfur emissions market for coal-burning electric utilities. The Chicago Board of Trade is even developing a futures market in emissions permits to help firms hedge against future permit price risks. Are such markets vulnerable or price manipulation? A diverse initial allocation of permits can reduce the likelihood of cartelization.

Emissions charges may be levied to (a) make polluters pay the social costs of their pollution, or (b) achieve a given standard at minimum cost. Emissions charges may be used to subsidize the development and adoption of emission control technologies. However, a system of charges is inherently less flexible than a marketable permit system: charges need to be adjusted in accordance with changing price levels, technologies and environmental standards.

Hazardous pollutants are controlled separately under the Clean Air Act. EPA is supposed to to list hazardous pollutants, quickly define ambient standards, and enforce them. Standards for hazardous pollutants are supposed to protect human health "with an adequate margin of safety." Caught between environmentalists' demands for zero-emissions standards and industrial necessity, the EPA has actually listed very few hazardous pollutants, and has tried to incorporate risk assessments and benefit-cost analyses into their regulatory policies.

Tietenberg summarizes Haigh, Harrison and Nichols's benefit-cost analyses of controlling benzene, coke oven emissions and acrylonitrile emissions. Valuing each human life saved at $1 million, they showed that strict BAT's and relaxed uniform emissions standards both yielded lower (more negative) net benefits than differential standards reflecting human exposures caused by each emittor. Nichols (Example 15.3) shows that standards reflect neither differential control costs nor differential exposures; emissions charges overlook reflect differential exposures; exposure charges do account for both control costs and exposure levels.