Do environmental markets cause environmental injustice? Evidence from California's carbon market

Market-based environmental policies are widely adopted on the basis of allocative efficiency. However, there is growing concern that market-induced spatial reallocation of pollution could widen existing pollution concentration gaps between disadvantaged and other communities. We examine how this “environmental justice” (EJ) gap changed following the 2013 introduction of California's carbon market, the world's second largest and the most subjected to EJ critiques. We estimate that the program lowered GHG, PM_2.5, PM₁₀, and NO_x emissions by 3–9% annually between 2012–2017 for sample industrial facilities regulated only by the carbon market. Using a pollution dispersal model to characterize resulting spatial changes in pollution concentrations, we find the program caused EJ gaps in PM_2.5, PM₁₀, and NO_x from these facilities to narrow by 6–10% annually. We demonstrate that explicit modeling of pollution dispersal is critical for detecting these results.