Faced with the growing threat of climate change, policymakers and regulators have increasingly sought ways to reduce greenhouse gas emissions. Cap-and-trade programs have become a popular policy option that sets a limit on overall emission levels but allows firms to trade emissions permits, thus creating market incentives for firms to reduce greenhouse gas emissions. These programs have been implemented in California, the northeastern United States, Europe, China, and elsewhere. Existing research suggests that these initiatives have been effective. In California, for example, recent evidence shows that facilities subject to cap-and-trade have reduced their greenhouse gas emissions by 3–9 percent.

Researchers, however, have paid less attention to the impact of cap-and-trade programs on other environmental outcomes, such as toxic chemical emissions. This is a crucial oversight. California facilities subject to cap-and-trade increased toxic emissions by 75 percent on average between 2013 and 2018—the first five years of the program. This is a startling increase given that California has historically had some of the lowest levels of toxic emissions in the United States. No comparable increase occurred among facilities not subject to cap-and-trade in California or other states. Could cap-and-trade programs be causing firms to reprioritize their efforts away from reducing toxic chemical emissions toward reducing greenhouse gas emissions, thus improving one environmental outcome while worsening another?

We investigated this question by comparing California facilities subject to cap-and-trade with similar facilities in other states not subject to cap-and-trade. Our research uses detailed Environmental Protection Agency (EPA) emissions data on 1,100 large US manufacturing facilities from 2010 to 2018. Our findings reveal that toxic emissions from facilities subject to cap-and-trade policies were about 26–42 percent higher on average in the five years after the introduction of the program than they would have been otherwise. Why? Treating toxic waste is a substantial source of greenhouse gas emissions; hence, increasing the cost of greenhouse gas emissions also makes treating toxic waste more expensive. As a result, cap-and-trade has inadvertently prompted firms to strategically cut back on their efforts to treat toxic waste, causing them to release more of it. Indeed, the more a facility reduced greenhouse gas emissions from its waste treatment processes after cap-and-trade was imposed, the more its toxic emissions increased.

Our research finds additional evidence that the increase in toxic emissions resulted from firms’ strategic choices. First, the facilities whose toxic emissions increased the most were those that relied on treating toxic waste after producing it. The smallest increases came from facilities that modified their manufacturing process to produce less toxic waste to begin with. Second, facilities that incurred recent EPA penalties for their toxic emissions increased their toxic emissions by less, presumably because these firms were trying to avoid additional penalties. Third, facilities increased toxic emissions the most for the least harmful chemicals—those least likely to invite increased scrutiny. Finally, even facilities not subject to cap-and-trade increased their toxic emissions if they were owned by firms with other facilities that were subject to the program. These observations suggest that firms are strategically choosing to increase toxic emissions at the corporate level.

Overall, our study shows that a major policy initiative meant to combat climate change has had the unintended consequence of increasing toxic emissions by causing firms to cut back on their voluntary environmental efforts. These findings have important social implications. Increased levels of toxic emissions have been linked to several serious health conditions—including asthma, cancer, and infant mortality—as well as ecological damage and economic harm. Although California’s cap-and-trade program reduced greenhouse gas emissions, the sharp increase in toxic emissions may pose a higher risk to California residents. Our study thus highlights the need for a more holistic approach when designing environmental regulations, one that considers the connections between different environmental goals.

NOTE
This research brief is based on Narae Lee and Aseem Kaul, “Robbing Peter to Pay Paul: The Impact of California’s Cap-and-Trade Program on Toxic Emissions,” Management Science 71, no. 6 (June 2025): 5409–18.