This paper presents results of an empirical study of emission banking for light-duty vehicle manufacturers. An intertemporal model of manufacturers' choices is combined with econometrically estimated abatement cost functions to simulate the cost savings and emission effects of an averaging, trading, and banking marketable permit system relative to command-and-control regulations. While the cost savings of such a system are estimated to be modest, the intertemporal emission effects may be sizable. The sensitivity of the results to discount rates, abatement cost functions, and model specifications is also explored.

The substantial reductions in motor vehicle emissions that have occurred since the late 1960s have been accompanied by continuous increases in vehicle emission control costs, and cost increases or decreases due to changes in vehicle performance such as driveability, power, fuel economy, and vehicle maintenance. In this paper, a systematic approach has been developed to estimate emission control costs for motor vehicles. The approach accounts for all emission control parts installed on vehicles, and the costs of these emission parts are estimated through their prices. This paper does not estimate costs of the changes in vehicle performance and maintenance caused by emission control.

Using information on emission control parts and their prices for new light-duty vehicles sold in California in 1990, per-vehicle control costs and total control costs for all new light-duty vehicles have been estimated. The cost to vehicle manufacturers per vehicle for emission control ranges from $220 to $1,460, depending on vehicle size and manufacturer. The sales-weighted average cost to manufacturers is $445 per vehicle. The total cost of emission control technology for 1990 light-duty vehicles sold in California is estimated to be about $698 million.

The corresponding cost to consumers per vehicle for emission control ranges from $370 to $2,430, with a sales-weighted average of $748. The total cost for emission control of 1990 light-duty vehicles sold in California is about $1.2 billion to consumers. Per-vehicle costs for vehicles sold elsewhere in the U.S. in 1990 are similar since emission standards were similar that year.

Recent data indicate that many U.S. areas still fail to meet national ambient air quality standards (NAAQS) for one or more criteria pollutants. In 1990, ninety-six U.S. metropolitan areas violated the federal ambient ozone standard, and forty-one areas violated the standard for carbon monoxide (CO), affecting over 100 million people (U.S. EPA, 1990a). The federal Clean Air Act (CAA) Amendments of 1990 established more stringent control measures to further reduce air pollutants (U.S. EPA, 1990b) in an effort to attain air quality standards.