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Cost-Effective Control of
Urban Smog
Smog in urban areas creates serious health and welfare problems for residents in
the United States and across the world. This book examines a pioneering
governmental effort to reduce emissions in the Chicago ozone nonattainment
region by a complex market designed to allow trading of pollution permits.
Cost-Effective Control of Urban Smog utilizes empirical data gathered over the
past four years to critically assess and evaluate the disappointing performance of
the Chicago cap-and-trade market. The authors describe the political economics
of the early market design process. In doing so, they identify one of the main
causes of subsequent performance deficiencies: the continued use of traditional
centralized regulation together with the use of decentralized market incentives.
That is, two policy instruments are used to try to achieve one environmental goal,
and they ended up in conflict. The authors develop extensive data to test and
elaborate these findings, and to establish a firm basis for an improved market
design, which could improve market performance. The cap-and-trade market
approach to controlling urban smog could then be a model for use elsewhere.
Richard F. Kosobud is Professor Emeritus of Economics and Houston H.

Stokes is Professor of Economics, they are both at the University of Illinois at
Chicago, USA. Carol D. Tallarico is Assistant Professor of Economics at
Dominican University, USA. Brian L. Scott is Visiting Assistant Professor of
Economics at the University of Alabama in Birmingham, Alabama, USA.
Routledge Explorations in Environmental
Economics
Edited by Nick Hanley
University of Glasgow
1 Greenhouse Economics
Value and ethics
Clive L. Spash
2 Oil Wealth and the Fate of Tropical Rainforests

Sven Wunder
3 The Economics of Climate Change

Edited by Anthony D. Owen and Nick Hanley
4 Alternatives for Environmental Valuation

Edited by Michael Getzner, Clive Spash and Sigrid Stagl
5 Environmental Sustainability
A consumption approach
Raghbendra Jha and K.V. Bhanu Murthy
6 Cost-Effective Control of Urban Smog

The significance of the Chicago cap-and-trade approach
Richard F. Kosobud, Houston H. Stokes, Carol D. Tallarico
and Brian L. Scott
Cost-Effective Control of
Urban Smog
The significance of the Chicago
cap-and-trade approach
Richard F. Kosobud,
Houston H. Stokes,
Carol D. Tallarico, and
Brian L. Scott
First published 2006
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Ave, New York, NY 10016
This edition published in the Taylor & Francis e-Library, 2006.
“To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.”
Routledge is an imprint of the Taylor & Francis Group,
an informa business
© 2006 Richard F. Kosobud, Houston H. Stokes,
Carol D. Tallarico, and Brian L. Scott
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in
writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available
from the British Library
Library of Congress Cataloging in Publication Data
Cost-effective control of urban smog: the significance of the Chicago
cap-and-trade approach / Richard F. Kosobud . . . [et al.].
p. cm.
Includes bibliographical reference and index.
1. Air – Pollution – Economic aspect. 2. Smog – Economic aspects.
3. Emission trading. I Kosobud, Richard F. II. Title.
HC79. A4C66 2005
363.739'26–dc22 2006003838
ISBN10: 0–415–70202–X
ISBN13: 978–0–415–70202–7
Contents
List of figures ix
List of tables xi
Foreword xiii
Preface xvii
Acknowledgments xxi
List of abbreviations xxiii
1 Introduction 1
Objectives 1
The political economy of the Chicago market design 3
Expectations and actual market performance 5
Traditional regulations and market incentives 7
Simulated performance of alternative market models 7
Explaining market performance 9
Hot spots, spikes, and emissions trading 10
Banking horizons of tradable permits: an experimental
approach 11
Conclusions and policy recommendations for
market redesign 12
2 The political economy of the Chicago market design 15

Introduction 15
Health and welfare motivations for market incentive
regulation 15
The regulatory options 18
The cost-effectiveness motivation for market incentive
regulation 20
The market design dialogue and decisions 23
Expectations of cap-and-trade market performance based
upon simulation modeling 28
vi Contents
3 Expectations and actual performance 30
Introduction 30
Actual market performance 30
The sources and uses of tradable permits 36
Explaining market performance 38
Were there industry level effects of traditional
regulations? 41
Conclusions 47
4 Traditional regulations and market incentives 48

Introduction 48
A brief history of air pollution regulation 50
Regulatory tools applied to VOC pollutants
under traditional systems 53
Weighing the alternative regulatory tools 56
5 Simulated performance of alternative market

model features 61
Introduction 61
Overview of the findings 62
Specifying the cap-and-trade model 63
Empirical implementation of the model 66
Simulations of the performance of the model 67
The simulation results 69
Market performance with spatially restricted trading 76
A normative theory of banking 77
Tradable permits as private financial assets 79
Conclusions and research directions 81
6 Explaining unanticipated market performance 83

Introduction 83
Responses of participants to the new market: a survey 84
Were there market problems, such as monopsony? 86
Were program design deficiencies affecting market
decisions? 89
Statistical tests of the hypotheses 93
Conclusions 99
Contents vii
7 Hot spots, spikes, and emissions trading 102
Introduction 102
The invisible hand of the market and concern about
hot spots 103
Delineating the appropriate sub-area 104
Detection and analysis of actual hot spots 108
Should spatial trading restrictions be placed on the market
to prevent hot spots? 123
8 Alternative market designs: the experimental approach 125

Introduction 125
Experiment parameters 126
The experiments 129
Experiment outcomes 131
Conclusions 136
9 Conclusions and policy recommendations for

market redesign 138
Introduction 138
What specific flaws in the original market design
need to be fixed? 140
Four sources of guidance on appropriate market designs 143
Policy recommendations for market redesign 154
Appendix A: measurement of daily ozone, precursor

concentrations, and selected meteorological variables 158
Appendix B: explanation of generalized least squares and

generalized additive models estimation techniques 160
Glossary 164
Bibliography 167
Index 173
Figures
5.1 Price determination and cost savings with a homogenous

pollutant 65
5.2 The relationships between the rate of reduction of
emissions and cost savings and number of ATUs
(allotment trading units) traded 71
5.3 The relationships between the variance of emitter
marginal cost slopes and cost savings and ATU (allotment
trading unit) prices when the aggregate target rate of
reduction is 12 percent 73
5.4 Individual emitter purchases and sales of permits at a
VOC reduction rate of 0.12, a permit equilibrium price
of $258, and a free allocation of permits 75
5.5 Individual emitter purchases of permits at a reduction rate
of 0.12 and an equilibrium price of $258, assuming the
government auctions the permits 75
5.6 Determination of the optimum level of banking given
expected prices 78
6.1 Dependent variable holdings by emissions size of
participants in 2000 87
6.2 Dependent variable holdings by emissions size of
6.3 Buying and selling by emissions size of
6.4 Variation in REG ratios by emissions size of participants 91
7.1 The 1999 population by zip code for the Chicago ozone
nonattainment region 111
7.2 Maximum baseline emissions by zip code for the
Chicago ozone nonattainment region 112
7.3 The 1998 emissions compared with baseline emissions by
zip code for the Chicago ozone nonattainment region 115
x Figures
7.7 The 2002 estimated emissions compared with baseline
emissions by zip code for the Chicago ozone nonattainment
region 120
region 121
region 122
Tables
2.1 Ozone morbidity damage reductions obtained by reducing

ozone concentrations 17
2.2 Requirements for ozone nonattainment areas 19
2.3 Urban area classifications for the eight-hour ozone standard 20
3.1 Market-wide ATU (tradable permit) transactions and
prices for the years 2000–3 31
3.2 Participant sources and uses of tradable permits (ATUs)
during year t (2003 IEPA aggregate data) 37
3.3 Yearly changes in emissions by SIC code 42
3.4 Expirations and permit banks by SIC code 45
3.5 Tradable permit purchases and sales by SIC code 46
4.1 Selected stationary-source emitters and processes subject
to RACT and MACT controls with government oversight 54
4.2 Case studies of additional control costs of reducing
VOC emissions by various control options in the Chicago
ozone nonattainment area 58
5.1 Estimated effects of changes in emission reduction rates
under free allocation 70
5.2 Estimated effects of changes in the variance of marginal
control costs (12 percent reduction rate) 72
5.3 Estimated effects of changes in transactions costs
(12 percent reduction rate) 73
5.4 Estimated effects of changes in emission reduction rates
under an auction market 74
5.5 Estimated effects of sub-area trading restrictions
(12 percent reduction rate) 76
5.6 Comparison of simulated and actual data for the Chicago
cap-and-trade market in 2001 82
6.1 Individual participant variable definition and measurement 93
6.2 Probit determinants of market participation in 2000–4 95
6.3 The dynamics of the VOC trading system driven by
enormous banks of permits 97
xii Tables
6.4 Zero-order correlations of individual participant emissions
(Baseline, 1998, 1999, 2000, 2001) 99
7.1 Yearly percentage changes in emissions by county 106
7.2 Yearly percentage change in emissions for hot spot townships 107
7.3 Yearly percentage change in emissions for hot spot zip codes 109
7.4 Demographics for hot spot zip codes 113
8.1 Experiment attributes 127
8.2 Marginal abatement costs by firm (listed in experimental dollars) 128
8.3 Experimental results of banking, expirations, and use of permits 132
8.4 Experimental results of trading 134
9.1 Comparative design features and performance of five
current cap-and-trade markets 144
9.2 Linear multivariate analyses of determinants of ozone
concentrations 152
B.1 OLS and GAM analyses of determinants of ozone
concentrations 162
Foreword
The natural human tendency is to trumpet success and to sweep failure under the
rug. How welcome and refreshing it is then to encounter the work of a dedicated
group of policy-minded scholars who have resisted this tendency and have
resolutely sought to find out what went wrong and what can be done about it. The
Chicago VOC trading program would have been worthy of study for any number
of reasons, and its lack of success adds yet another, and more compelling one.
Failure is a better teacher than success, and anyone interested in the use of
market-based instruments for environmental regulation will find this book rich in
lessons and well worth the read.
The underlying issue in this work is one that must be considered in the
implementation of most cap-and-trade programs: how is the new market-based
system to relate to the conventional, prescriptive regulation that is already in
place? The story is a cautionary tale concerning the use of two instruments to
meet the same objective. In this case, the cap-and-trade system became, as the
authors put it, “window dressing” (of appropriate market design) for the tradi-
tional, prescriptive system that did the real work. While the environmental objec-
tive was handily achieved, the market-based system can take little credit for the
emissions reduction, not to mention any significant cost reduction. Indeed, its
main contribution may have been only to add to the already higher cost by the
need to account for allowances and emissions for what turned out to be a largely
redundant regulatory mechanism.
Previous cap-and-trade systems also co-existed with pre-existing, conventional,
prescriptive regulation, but there is an important difference between the Chicago
VOC system and those predecessors. In the earlier cases, traditional regulation
had largely spent its force, or had proved either politically infeasible or unable to
achieve further emissions reductions. The cap-and-trade addition aimed either to
go beyond what could be achieved by the traditional means of regulation, as in
the RECLAIM or NOX Budget Programs, or to achieve a different environmental
objective, as in the Acid Rain/SO2 Trading Program. In the Chicago VOC trading
program, the usual form of regulation was alive and well, and, as amply demon-
strated in this book, fully capable of meeting the environmental objective, albeit
at greater cost and perhaps less equity in the distribution of the regulatory burden.
xiv Foreword
The most that can be said of the cap-and-trade overlay is that it permitted a few
firms facing very high costs of compliance with the conventional prescriptive
regulation to gain some relief. For the vast majority, the trading system was
simply an irrelevant, extra burden.
For the reader, there are a number of interesting sub-plots in this story. One is
the rationale for using two instruments. The two were happily heralded as being
complementary: the cap-and-trade system would reduce costs and the prescriptive
system would ensure against hot spots and other micro-level worries. That the
result was something else is not so much an argument against market-based
systems as it is a caution against wishful thinking and failing to pay close attention
to interactions with the conventional regulatory system. The authors make an apt
analogy to the well known failure of the liberalization of electricity markets in
California, which was also an instance of failing to understand interactions and
an attempt to have the best of both worlds.
Another interesting insight in this book is the glimpse into how a conventional
regulatory system actually works, an area in which very little research has been
done and which the authors can address because of the micro-data that were avail-
able to them. They offer a vivid metaphor of a hammer that randomly falls on a
line of nails with varying force, driving some deeply into the wood, others not
nearly so much, and some hardly at all. Emissions are reduced but in a haphazard
manner that makes one wonder why people worry about the unpredictable results
of markets. As the authors point out, the cause is not laxness, sloppiness, or
corruption of the conventional regulatory system, but the workings of separate
prescriptions concerning inputs, particular processes, and other aspects of
production that fall with uneven and uncertain effect on the emissions of the
regulated firms.
The research presented in this book offers many other interesting insights.
The Chicago experience shows that a nonbinding cap does not mean that all
allocations to firms are slack. Some firms can still be short and, in the absence
of good information about the status of other firms, pay good money for permits
that would otherwise be priced at zero. The phenomenon of positive prices in
a slack system also provides a warning against thinking that observed prices
necessarily reflect control costs. The authors have not attempted to estimate
the cost of the emissions reduction that was achieved by traditional regulatory
means, but they demonstrate that market incentives were not operating, and that,
more than anything else, the prices observed reflected poor information and
transactions costs.
As advocates of the use of market-based incentives in environmental
regulation, the authors admit that they were hesitant in advancing their critique of
the Chicago experiment for fear of “rekindling old arguments” about emissions
trading. Their brave decision to do so nonetheless, in order to produce this
model of policy-related academic research, is commendable. The architects and
participants in the Chicago VOC trading program are fortunate to have this
soundly based and clearly argued research as the basis for needed changes to
Foreword xv
the present system. Policy analysts and designers of future cap-and-trade systems
will be forever in their debt for not sweeping the whole subject under the rug and
describing what can result when two instruments are used to achieve the same
objective.
A. Denny Ellerman
Center for Energy and Environmental Policy Research
Massachusetts Institute of Technology
January 2006
Preface
The authors hope this book conveys their enthusiasm about studying up closely
the pioneering implementation of a cap-and-trade market to reduce stationary-
source volatile organic compounds (VOC) emissions in the Chicago ozone
nonattainment area. Among the reasons for this enthusiasm are the promises that
this decentralized environmental regulation by market incentives can bring about
cost-effective, innovation stimulating, flexible, and nonconfrontational reduction
of pollution in comparison with traditional regulations.
Earlier efforts to utilize cap-and-trade markets to reduce air pollution, and
notably the documented achievements of the US sulfur dioxide program, have
converted a number of doubters and skeptics into supporters. Other implementa-
tions then followed, among them the cap-and-trade market to reduce nitrogen
oxides in the US and preliminary efforts to reduce carbon dioxide emissions
through the use of cap-and-trade markets in the European Union. To be able
to add a useful book on the Chicago VOC program seemed appropriate and
well timed.
This research could contribute new information to the growing but as yet small
knowledge base on the use of market incentives in environmental policy. The
pollutants, the hydrocarbons that make up VOC, are precursors of low-level ozone
concentrations, which have been found to be harmful to human health and
welfare. The VOC emissions are numerous and contain a subset of hazardous air
pollutants (HAPs) that are harmful in themselves. The pollutants arise from a
diversity of sources found in the production processes and inputs of a wide variety
of emitters, large and small. Few of the emissions giving rise to VOC concentra-
tions can be tracked with continuous electronic monitoring equipment, adding to
the problems of emissions measurement and regulation.
In addition, a dense set of centralized traditional command-and-control
regulations, devised over a long period of time and worked out in detail, were
already in existence, with accompanying protocols, monitoring and enforcement
procedures. These regulations, extensive as they were, resulted in only modest
reductions of the stubborn VOC and ozone concentrations, partly because
they failed to cap VOC emissions. However, command-and-control measures
were familiar, easy to understand, and gave the impression of action on the
pollution front.
xviii Preface
Traditional regulations were characteristic of US environmental policy for
much of the twentieth century. They were responsible for some reduction of
pollution, although in most cases not to acceptable levels, but at the cost of rising
marginal control costs and increasing confrontation between the regulating and
regulated communities. Environmental groups were frequently dissatisfied with
the activities of both sides. There was concern among some observers that the
problems being encountered would slow the momentum for improving environ-
mental quality, unless alternative regulatory measures were implemented. This
brought about the authors’ interest in bringing to the attention of the reader the
gains that could be achieved by a new application of a cost-effective, decentralized
form of regulation.
The introduction of any new complex form of decentralized regulation into this
system cannot be free of problems. These problems and the efforts to resolve
them are explained in detail for the interested reader. This book is not only a case
study of the implementation of a dramatic regulatory innovation in a difficult
setting, but also an effort to relate the Chicago program to the larger economic
and political issues of the use of market incentives to control a major urban pol-
lutant. The authors are aware that many other urban areas in the US and elsewhere
suffer the harms and welfare losses of ozone and its precursors. Readers from
these areas could have a special interest in the outcomes of the Chicago VOC
cap-and-trade market that are explained in this book.
The reader interested in the authors’ qualifications should know that the
authors were involved in the implementation of this program from the design start
in 1995 through the current date. They were thus able to pay close attention to the
development and execution of the market, including discussions with all partici-
pants and observers. The authors were also able to assemble a detailed database
on the design and recorded activities of the market, which proved of great value
in analyzing its performance during the first five years of the program, from 2000
through 2004. Before the start of market trading, the Illinois Environmental
Protection Agency (IEPA) set up a dialogue group to bring together regulators,
affected businesses, local environmental groups, and academics, such as the
authors, to discuss and debate the many design decisions to be made about the
features of the VOC cap-and-trade market. This discussion can be very revealing
to the reader interested in the political economy of a cap-and-trade market and is
reported in detail in this book.
The setup for trading in quantities of pollution in a cap-and-trade market differs
in important ways from the trading practices in private markets, for instance in
bread or wine. The IEPA must determine which firms are to be included in the
market and the reduction from benchmark emissions (the cap) that is required for
the protection of air quality. Then, decisions must be made about the definition and
pollutant content of the tradable permit, the allotment of permits to individual
emitters, and the length of life of the permit after issuance. Finally, decisions are
required about the monitoring of emissions and the enforcement of market rules.
These design decisions affect the performance of the environmental market,
and they can affect the confidence the public will have in supporting the market
Preface xix
and in understanding its role in regulation. Having the government allot permits
to pollute rather than reduce these unpleasant substances to zero can be explained
by the careful consideration of these decisions that is provided in the text.
Reducing these emissions to zero is both practically impossible and prohibitively
costly.
The final design of the market was a compromise of the various positions
taken in this dialogue debate, especially the positions taken by the business and
environmental communities. A summary of these discussions and the important
final decisions are provided in this volume for the reader, since they will have a
significant bearing on the final analysis.
After the design decisions are made, the new regulation then requires the
government to step back and allow emitters to manage their permit portfolios and
to reduce emissions, to the extent and by whatever control measures they wish,
all, hopefully, with cost minimization in mind. Managing the permit portfolio
involves buying or selling permits, returning them to the government to cover
emissions, or banking them for future use, guided by market incentives. An effective
market at equilibrium will find all emitters equating their marginal control-costs
to the equilibrium price of the permit, thus achieving a level of aggregate control
cost that, in almost all cases, will be below the level achieved by centralized
implementation of traditional regulations on all emitters. The authors modeled
these private emitter decisions in an abstract, ideal model in order to provide
forecasts of what might be expected prior to the start of the actual trading in 2000.
These forecasts could then be compared with observed market outcomes.
The enthusiasm of the authors was challenged by the departures of the actual
performance of the VOC market over the first four years, when compared with the
forecasted, and expected, outcomes. Emissions were much lower than predicted,
permit banks were much higher, and permit prices were well below expected
values. Most surprising were large expirations of tradable permits. Something
had gone amiss, after years of good work by all involved. While some problems
had been anticipated and were thought to be amenable to small adjustments, the
scale of the problems being encountered had not been foreseen by any of the
participants or observers.
A good idea for environmental regulation that runs aground in a particular
implementation can yield valuable knowledge, not only to facilitate correction of
the problems, but also to provide lessons for others planning similar innovations.
This was the position taken by the authors, who were determined to find answers
to the many questions posed by the surprising and unsettling market performance.
The authors harnessed their original enthusiasms, in order to embark on an
exploration of reasons for these perplexing market outcomes and to search for
ways to resolve these problems.
The authors invite the reader to join in this exploration. It will cover such market
imperfections as monopsony and imperfect information. It will also deal with
such matters as the recession and the possibility of over-allocation by the regu-
lating agency. Finally, it will confront the dual regulation character of the VOC
market in Chicago in which a particular compromised market design came into
xx Preface
contact with the dense set of traditional regulations that impacted on market
incentives. That is, two regulatory instruments were utilized to achieve one envi-
ronmental goal, the reduction of VOC emissions. Therein lies the problem. The
authors believe their search has been successful in revealing the reasons for the
problems encountered thus yielding valuable knowledge about the pitfalls of
implementing a new regulation, and a reward for the research effort.
The reader will see these findings explored and tested empirically. What
emerges is a sorting of the reasons for the unexpected performance that stands up
to rigorous statistical analysis. The objective is not only to identify the reasons
for the problems but also to lay a firm basis for correction of the market design
deficiencies.
To propose a redesign of a complex cap-and-trade market is a serious undertaking
that will have to hold out the promise of success and will have to secure the
support of concerned groups. The authors have utilized several sources of infor-
mation and undertaken original research in an effort to realize these objectives.
These efforts include: a study of tradable permit banking horizons, based upon
simulated markets devised by experimental economic methods; an estimation of
the appropriate cap for the redesigned market, based upon daily ozone and
precursor data for the Chicago area obtained during the hot summer of 2005; and
a comparison of the VOC approach with that of other cap-and-trade markets.
What results from this work is a recipe for redesign of the VOC market that can
be presented to all the participants in the Chicago program, and to the reader, for
their evaluations. While the current market performance turned out different from
first expectations, the good work invested in the innovative program can be mod-
ified along the lines set forth in this volume to increase the chances of reaching
the original environmental goals. Urban ozone is an important problem and
reducing the precursors of urban ozone is a necessary step in its control. Such
control had not been achieved by traditional regulations, nor was it expected to be
easily achieved by the use of a cap-and-trade market. However, the authors
believe their work will further the prospect of success in the not too distant future.
Acknowledgments
The authors are indebted to numerous people and institutions for comments and
data that proved invaluable in this book. The list enumerated below is by no
means complete, but may suffice in giving a representative sample of the sources
upon which the authors have drawn.
The following people listed alphabetically were among those who gave helpful
comments or research assistance at various stages in the work:
DePriest, William, Manager, Environmental Services, Fossil Power Technology
Group, Sargent & Lundy LLC, Chicago, IL.
Ellerman, A. Denny, Senior Lecturer, Sloan School of Management and Faculty
Associate, Center of Energy and Environmental Policy Research,
Massachusetts Institute of Technology, Cambridge, MA.
Harley, Keith, Chicago Legal Clinic, Chicago, IL.
Hermanson, Robert, Environmental Consultant, BP West Coast Products, LLC,
Naperville, IL.
Hoelscher, Joanna, Citizens for a Better Environment, Chicago, IL.
Jiric, Alan, Director of Regulatory Affairs, Corn Products International Inc., Bedford
Park, IL.
Kanerva, Roger, Adjunct Faculty, University of Illinois at Springfield,
Springfield, IL, USA. Formerly Chief Policy Adviser, Illinois Environmental
Protection Agency, Springfield, IL.
Kosobud, Adam D., Research Assistant, Department of Psychology, University of
Chicago, Chicago, IL.
Kroack, Laurel L., Manager, Bureau of Air, Illinois Environmental Protection
Agency, Springfield, IL.
Linn, Joshua, Professor of Economics, University of Illinois at Chicago,
Chicago, IL.
McGrath, Daniel T., Associate Director, Institute for Environmental Science and
Policy, University of Illinois at Chicago, Chicago, IL.
Scheff, Peter A., Professor of Environmental and Occupational Health Sciences,
University of Illinois at Chicago, Chicago, IL.
Summerhays, John, Air Program Branch, US Environmental Protection Agency,
Region V, Chicago, IL.
xxii Acknowledgments
Stokes, Diana A., Editorial Processing Manager, American Medical Association,
scientific publications, retired.
Theis, Thomas, Director, Institute for Environmental Science and Policy,
University of Illinois at Chicago, Chicago, IL.
Among the places that presentations were made of work in progress were the
following:
Center of Energy and Environmental Policy Research, Massachusetts Institute of
Technology, Cambridge, MA.
Illinois Economics Association, Chicago, IL.
Illinois Environmental Protection Agency, Springfield, IL.
Institute for Environmental Science and Policy, University of Illinois at Chicago,
Chicago, IL.
Midwest Economics Association, Saint Louis, Mo.
Special mention must be made of those who helped by contributing important

data and explanations of data concepts:
Bloomberg, David E., Manager Compliance Unit, Illinois Environmental
Protection Agency, Springfield, IL.
Ostrem, Stan, Environmental Analyst, Illinois Environmental Protection Agency,
Springfield, IL.
Price, Chris, Environmental Analyst, Illinois Environmental Protection Agency,
Springfield, IL.
Wachowski, Frank, Meteorologist, National Weather Service, retired.
Abbreviations
ACMA Alternative Compliance Market Account

ATU Allotment Trading Unit
BACT Best Available Control Technology
CAA US Clean Air Act of 1970
CAAA US Clean Air Act Amendments of 1990
CAIR Clean Air Interstate Rule
CAMR Clean Air Mercury Rule
CO Molecular formula for carbon monoxide
CO2 Molecular formula for carbon dioxide
CTG Control Technology Guideline
DIP Variable name for the 2001 recession
ERC Emission reduction credit
ERG Emission reduction generator
ERM Variable name for the effect of market incentives
ERMS Emissions Reduction Market System
GAM Generalized Additive Model
GLS Generalized least squares
HAP Hazardous air pollutants
HAPDUM Variable name assigned to emitters with HAP emissions
IEPA Illinois Environmental Protection Agency
LADCO Lake Michigan Air Directors Consortium
LAER Lowest Achievable Emission Rate
LMOS Lake Michigan Ozone Study
MACT Maximum Achievable Control Technology
NAAQS US National Ambient Air Quality Standards
NESHAP US National Emissions Standards for Hazardous Air Pollutants
NO Molecular formula for nitrogen oxide
NO2 Molecular formula for nitrogen dioxide
NOX Molecular formula for nitrogen oxides
NSR New Source Review
O3 Molecular formula for ozone
OLS Ordinary least squares
OTAG Ozone Transport Assessment Group
xxiv Abbreviations
OTC Ozone Transport Commission
RACT Reasonable Available Control Technologies
RECLAIM Regional Clean Air Incentive Market
REG Variable name for the effect of traditional regulations
ROG Reactive organic gases
SCAQMD South Coast Air Quality Management District
SIC Standard Industrial Classification
SO2 Molecular formula for sulfur dioxide
US EPA US Environmental Protection Agency
VOC Volatile organic compound emissions
VOM Volatile organic material
WBMCC Variable name for World Bank-estimated marginal control costs
1 Introduction
Objectives
Any comprehensive effort to describe and analyze a pioneering and innovative
environmental regulatory measure based on market incentives designed to control
a serious urban air quality problem deserves more than the customary brief intro-
duction. This serious problem concerns the harms and welfare losses attributable
to low-level ozone and one of its precursors, volatile organic compound (VOC)
emissions. This book aims to be that comprehensive effort covering the initial
contentious market design discussions, the expectations and actual performance
of the regulation during the first years, the surprises and problems encountered,
the search for and diagnosis of the causes of the problems, and, finally, the
proposals to redesign the market to achieve improved air quality.
While each of the four authors had a special responsibility for particular
chapters dealing with these topics, the separate contributions were thoroughly
discussed and integrated so that the book is meant to be read from start to finish,
with subsequent presentations building on prior work. Nevertheless, it is
recognized that some readers may be more interested in the market performance,
others in the statistical analysis of problems, and yet others in the policy conclu-
sions. Therefore, this introduction has been prepared as a guide outlining the
major topics presented in each chapter. This introduction may also be valuable for
readers desiring a substantive overview before taking up the important content
and details.
As a general introduction, the authors call attention to the recent development
of emissions trading, especially the cap-and-trade variant, as a now well-received
and potentially more cost-effective, flexible, and less confrontational choice than
traditional regulations for control of environmental quality. By traditional regula-
tions the authors refer to centralized mandating by the US Environmental
Protection Agency (US EPA) of pollutant emission rates and/or control technolo-
gies. Marginal control costs are typically not equalized under this regulatory
regime, frequently termed command-and-control.
By cap-and-trade market the authors refer to the decentralized design of an
environmental market in which the government allocates tradable permits to
emitters that reduce prevailing or historical pollution levels. The emitters,
2 Introduction
assumed to be cost minimizers, are free to trade permits, bank them, or choose
control measures. The government collects a permit for each unit of pollution
emitted and monitors and enforces market rules, but allows emitters to make the
micro-control and permit portfolio decisions. In theory, marginal control costs are
equalized across all emitters when the market is in equilibrium, leading to control
costs typically below those of centralized regulation. This latter model and depar-
tures from it underlie much of this book and is explained in detail in Chapter 5.
Not long ago, the use of decentralized market incentives was hardly on the
agenda of the regulating and regulated communities, and certainly not on
the agenda of the environmental communities. It was to be found in the table of
contents of economic journals where the theory was under serious consideration.
Such studies while demonstrating the cost-effectiveness and flexibility of market
incentives were not sufficient in and of themselves to have them adopted as a
matter of public policy, as the authors shall explain. What mattered more were the
increasing costs imposed by traditional regulations.
The national sulfur dioxide (SO2) trading system, a cap-and-trade market,
established by the US Clean Air Act Amendments of 1990 (CAAA 1990), was a
major breakthrough and is now widely regarded as a success (Ellerman et al.
1997: 64). Other cap-and-trade markets, for example, the US EPA-managed
nitrogen oxides (NOX) trading system is being closely monitored and now seems
well on its way to a successful implementation. The European Community is
developing cap-and-trade systems in an effort to reduce carbon dioxide (CO2)
emissions (Kruger and Pizer 2004: 8–23). An extension to other pollutants, such
as VOC emissions, seemed a natural next step. Both VOC emissions as a precur-
sor of urban ozone concentrations and the concentrations themselves have
adverse health and visibility effects and are important constituents of urban smog.
This book is focused on the market control of VOC and urban ozone because
designing a market for these pollutants raises special considerations and chal-
lenges. The authors evaluate the performance of a cap-and-trade market to reduce
stationary-source air emissions of VOC in the Chicago ozone nonattainment area,
one of the first market systems implemented in an effort to reduce an urban pol-
lutant rather than a regional, national, or global air quality problem. The diversity
of hydrocarbons that make up VOC emissions, the inclusion of hazardous air pol-
lutants as a subset, the wide variety and complexity of sources of these emissions
with challenging problems of measurement, and the existence of a complex set of
traditional regulations already in effect all created special issues and choices in
designing a market system, and in formulating effective market rules and emis-
sion measurement protocols. Despite these complications, the expectations were
for another success story when the new program began in 2000.
In general, the merits of a decentralized trading approach to reducing pollution
have often been expressed and analyzed by economists in abstract models and a
version of that analysis will be presented in a later chapter. However, there
remained an unease among some observers, including many environmental
groups, a number of businesses, and even some regulators, about possible
problems with the use of autonomous and anonymous markets in environmental
Introduction 3
regulation. For example, environmental groups were concerned about hot spots,
business participants about benchmarks and permit prices, and regulators about
emissions measurement and monitoring. Many of these views were contentious
and entered into the market design decisions. They also were influential in the
decision by the Illinois Environmental Protection Agency (IEPA) to retain and
extend traditional regulations while developing an emissions trading approach to
be placed along side the former. This unique feature of the pioneering Chicago
program, a dual centralized and decentralized regulation of VOC emissions, has
played a major role in the cap-and-trade market design and its implementation.
A detailed explanation and analysis of the consequences of this combined
regulation will be one of the major objectives of this book.
The book has other important objectives. It aims to provide a detailed
description of the first four years of performance of the VOC cap-and-trade
market, presenting the facts given by the IEPA plus data generated by our own
accounting. That is, the authors provide seasonal data on benchmark emissions,
allotments of tradable permits, emissions covered by the return to the agency of
tradable permits, banks, and prices of permits in addition to our estimates of
expirations or non-use of dated permits. The intention is to evaluate these data to
determine the extent to which the VOC cap-and-trade market has met its air
quality, cost-effectiveness, and flexibility goals. Whether these goals have been
met by the performance of the market will require a probing beneath the observ-
able data. To the extent the program has fallen short of its goals, as the authors
find in this research, it provides a strong motivation to search for and provide
evidence on the relative importance of each cause or explanation of the shortfall
as a preliminary guide to redesign of the market.
Also, it is our intention to evaluate the extent to which the cap-and-trade
approach used in Chicago can be recommended to other urban areas confronted
with VOC emissions and low-level ozone. To satisfy these objectives requires that
the authors first provide information on the origin and design of the innovative
market approach.
The political economy of the Chicago market design

As an essential background, in Chapter 2 the authors review air quality trends in
the Chicago region and the currently known health and visibility impacts of VOC
emissions and low-level ozone concentrations. While the body of knowledge on
these impacts is by no means complete or definitive in all aspects, and a detailed
benefit–cost analysis is not yet available, there is general agreement about
adverse health effects and the welfare consequences of poor visibility. The
authors summarize relevant knowledge about these local effects that comprise a
central motivation for government to take further regulatory action.
The VOC emissions and resultant ozone concentrations from these and other
precursor emissions have proved historically stubborn to efforts at control. The
VOC emissions comprise many hydrocarbons that arise from numerous coatings,
solvents, and glue solutions to emissions from factory processes, paints, and food
4 Introduction
and drug preparations. This multiplicity of sources translates into a wide diversity
of enterprises, private and public, that must be taken into account in the design of
a market program, if reductions are to be realized. The authors describe this
diversity and point out the problems they create for government decisions in
measuring emissions and in determining benchmark and allotment quantities as
well as other market features.
The initial plan of the IEPA had been to develop a cap-and-trade market to
reduce NOX emissions, and hence concentrations, another precursor of urban
ozone interacting with VOC concentrations. VOC emissions would continue to be
controlled by traditional regulations. This NOX plan would have involved a
simpler market design, as the authors will explain. When it was discovered that
incoming concentrations of NOX were already high coming from regions outside
the Chicago area, it was clear that a national program was required to reduce these
concentrations. The IEPA then turned to the application of a market incentive
program to reduce VOC emissions, which were more local in their emission
sources and concentration patterns, and much more complex in their market
design requirements. They too, like NOX emissions, had posed problems for
regulation: they had been stubborn in the face of controls, they were a matter of
confrontation between regulating and regulated communities, and they were
subject to increasing marginal control costs as more restrictive control measures
were instituted.
An important part of this chapter is a detailed account of the long and
contentious process of VOC market design carried out by the IEPA, a process that
not only built on the theory of a cap-and-trade market but also was greatly influ-
enced by the comments and arguments of various consultative groups, including
government, business, environmental, and academic communities. The objective
at this point is not to apply a theory of government environmental regulation of
either the public interest or pressure group variant, but to note the positions of the
various groups on particular market features.
A cap-and-trade market is built up of a number of features, each of which must
function effectively for successful results. Each of these features can be specified
in different ways by the regulating agency, and the particular way in which a fea-
ture is specified can significantly affect market performance. A detailed account
of these features as they were decided upon in the Chicago approach can provide
a guide to the anatomy of the cap-and-trade market and important information
about possible design deficiencies. The authors participated in a number of early
design discussions of the Chicago program, called dialogues, among concerned
groups and the IEPA, which raised a long list of concerns about the design. The
discussions revealed wide and often contentious differences in views about vital
market features that were reconciled in a series of compromises by the IEPA, as
explained in Chapter 2.
One important market design problem for the government, infrequently
addressed or worked out in detail, is how to integrate the design of the cap-and-
trade market program into existing, traditional regulations. Integration is easy to
overlook or set aside when confronting the many decisions in designing the
Introduction 5
market. The authors find that this relationship between these dual regulatory
approaches is a unique and key factor in explaining the current performance of
the market as described in Chapter 2. Before the start of the market, the agency
heralded this dual regulation in the final design, one of the key compromises, as
combining the strengths and overcoming the weaknesses of each regulatory
approach. The market system was essentially placed on top of traditional regula-
tions in the expectation that it could function in isolation from that foundation.
This dual relationship exists in most cap-and-trade markets and our research in
this area could be valuable in evaluating the future performance of such markets
and devising more successful ways to integrate the two systems.
The cap-and-trade market design decisions were subject to the monitoring and
approval of the federal layer of environmental government. Traditional regula-
tions are most frequently promulgated and guided by the US EPA with important
implementation procedures developed by the states. A number of options are left
to be initiated and developed by the states in their efforts to meet national envi-
ronmental goals. So it was with the VOC cap-and-trade market that was chosen
by the IEPA as an option for the Chicago ozone nonattainment area to be added
to the existing traditional regulations. This option was available under the one-
hour ozone concentration standard for urban areas with episodic ozone concen-
tration exceedances at or above above 125 ppb (parts per billion). Under this
standard, Chicago was a severe ozone nonattainment area. A new standard at
which exceedances occurred when concentrations rose at or above 85 ppb aver-
aged over eight hours was put in place by the US EPA, beginning in 2005.
According to present classifications, under the new standard the Chicago region
becomes a “moderate” ozone nonattainment area. The VOC cap-and-trade market
regulatory choice continues under the new classification. However, the lower
acceptable threshold for ozone concentrations suggests that a redesign of some
features of the market will be in order. Redesigning the existing market in light
of the new ozone goals and integrating it with traditional regulations will be a
demanding assignment for the IEPA. The efforts in this book to analyze the
present functioning of the market are intended to be the basis for the authors’
recommendations for that fundamental redesign.
Expectations and actual market performance

In Chapter 3, the authors stress that the actual performance of a pioneering
environmental market innovation requires a careful analysis, given the differences
from the standard market model and given the differing expectations of the
interest groups. The first year or two may be viewed as a learning experience on
the part of both regulated and regulating communities. After this initial period,
patterns can be treated more seriously.
The first four years of performance of the market, presented in summary form
in Table 3.1, reveal that the market was working in the sense that participants
accepted market rules and reported emissions and transactions as required. The
new regulatory system was underway for a wide variety of enterprises, large and
6 Introduction
small, indicating the feasibility of decentralizing facility level control decisions.
The results in Table 3.1 also reveal unexpected, puzzling, and even startling
results, departing from earlier predictions of researchers and significantly differ-
ent from expectations of emitters, the regulating agency, environmental groups
and academics. These results included:
1 emissions far below the cap;

2 transactions fewer than expected;
3 banks of permits that grew to enormous values;
4 prices much lower than anticipated;
5 and, perhaps most surprising, many valuable permits allowed to expire
without use.
These results are based upon agency data reported in the annual performance
reports in addition to some calculations by the authors to achieve consistency
demanded by our tabular presentation, as will be explained. Inconsistencies and
gaps in agency-provided data led the authors to construct a tradable permit
sources and uses table that provides a framework for checking the consistency of
data. It also provides a framework for a deeper analysis of the flow of transactions
in the market. The agency has not yet adopted such a table. The authors illustrate
the advantages of the table in an application presented in Chapter 3.
The fact that emissions were reduced far below the cap was regarded by the
agency as a success of the market system. While the authors too applaud this
reduction, our findings, which will be supported later, are that continuing and
extended traditional regulations were binding in reducing emissions and not the
market system or cap. Enormous banks, large expirations, and very low prices of
tradable permits call for careful appraisal as they suggest design imperfections.
Such surprising market outcomes led the authors to a reconsideration of the
existing market design and to concerns that the Chicago cap-and-trade approach,
locally called the Emissions Reduction Market System (ERMS), was performing
far below its potential in achieving cost savings, innovation, and flexibility. There
is every indication from information emanating from the agency that such out-
comes continued after the first four years; that is, the market suffers from certain
design, rather than transitory, problems.
No evaluation of the cap-and-trade program would be complete or of value
without a full account and analysis of these perplexing outcomes. A number of
explanations are put forward in an effort to understand this market performance,
several of them discovered in subsequent research and others obtained from
discussions with concerned observers. One of the major research efforts reported
in this book is to formulate hypotheses to test the soundness of these explanations
and their capacity to point the way toward remedial action. This will require the
search for and development of data and statistical methods that will enable us to
reach new conclusions about how market design imperfections interacted with
external constraints on market incentives. These conclusions could be of great
help in the forthcoming redesign of the market and provide guidance to other
urban areas considering this new tool to reduce their smog problems.
Introduction 7
Traditional regulations and market incentives
Environmental regulation for improvement of land, air, and water quality for
much of the twentieth century was mainly of the centralized, prescriptive type,
often called command-and-control regulation. Certainly, the important national
legislation of 1970 that set standards for VOC among other air pollutants and
established the US EPA, envisioned centralized or traditional regulations as the
main measures to be used to obtain improved air quality. Market incentives are a
relatively recent regulatory measure that to date have been combined in varying
ways with traditional regulations. Chapter 4 describes how centralized traditional
regulations are expected to work before analyzing how they may work in combi-
nation with decentralized market incentives.
Traditional regulations, as the authors have mentioned, set limits on the rate of
emissions for particular processes or prescribes technologies often based on
particular control techniques to be applied to specific processes. On occasion,
emission limits are set in advance of known capabilities in an effort to “force
control technology” to be developed by the firm. Traditional regulations also set
limits on the VOC content of certain inputs that vary widely in type and pollutant
content. By congressional mandate, the regulating community was to consider
health impacts and not the costs of control in setting these limits. Given the wide
diversity of pollutants, production processes, and inputs, the environmental
protection agencies have been hard pressed to develop regulations to cover all of
these, not to mention keeping up with new information and changes.
When the acceptable rates of emissions were established, it was clear that mar-
ginal control costs would not be equalized among emitters, and therefore a least
aggregate control cost would not be achieved. That was not the objective of the
regulations. Note that controlling the rates of emission or the use of particular
inputs does not limit the aggregate volume of pollution that can vary by rate of
economic activity or by entrance of new emitters into the pollution area.
Chapter 4 describes relevant features of this centralized regulation as they were
applied to VOC emissions control. These measures continued during the market
period and increased in number and intensity, especially for the hazardous air
pollutants (HAPs) components of VOC, which are numerous and not yet com-
pletely prescribed by acceptable levels and control techniques. While much of this
regulation was specified in guideline fashion at the federal level by the US EPA,
implementation, monitoring, and enforcement was left to state and local levels of
government. One important question raised in this chapter concerns how the limits
prescribed by traditional regulations could constrain market decisions made under
the particular design of the Chicago program. For example, traditional regulations,
by lowering emissions below tradable permit market allotments for the firm or by
setting a ceiling on emissions levels, could constrain market transactions.
Simulated performance of alternative market models

Interested researchers like the authors were eager to prepare estimates of the
performance of the proposed market before the start-up date even though data
8 Introduction
were limited on enterprise control cost functions, an essential part of any
forecasts. As described in Chapter 5, the authors, making use of limited data,
developed a model based on the theory of emissions trading. It will be valuable
to repeat the aspects of this theory in preparation for the simulations. This
normative theory asserts that in a competitive market with cost-minimizing emit-
ters, the regulating agency allocates quantities of tradable permits to pollute
below prevailing levels to achieve desired air quality. These are then allocated to
individual emitters according to some agreed upon rule, such as the emitter’s
share of pollution.
The regulating agency allows emitters to decide on the basis of permit price
whether to reduce emissions by any available technique that they choose, to emit
and return permits, to trade them, or to bank permits for later use with the
objective of stimulating cost-minimizing control choices. Tradable permits are
denominated in a quantity of VOC emissions, and participants in the market are
required to return a permit to the government for every like volume of VOC they
emit. At equilibrium, with well-behaved cost functions, all cost-minimizing emit-
ters will equate the marginal costs of control to the market price of permits.
Equality of marginal costs across all emitters will yield a minimum of aggregate
control costs usually well below costs of traditional regulations (Montgomery
1972: 359–418; Stavins 2000: 55). The model excluded traditional regulations in
an effort to focus on the results of the optimization framework. That is, the market
is expected to work as a standard market once permits were allocated.
An important part of Chapter 5 reports on simulations of this model. It utilizes
an algorithm that searches for a price clearing equilibrium, based upon estimated
marginal control costs obtained from IEPA reports that vary from one Standard
Industrial Classification (SIC) group of emitters to another (Dunham and Case
1997: 23). That equilibrium generates predictions of transactions and emissions
for individual firms and for the aggregate market as well as predictions of trad-
able permit prices. The outputs of the model, all prepared prior to the market’s
start date of 2000, could then be compared to the later, actual performance of the
market as portrayed in Chapter 3.
When subsequently compared, the abstract model predictions varied markedly
from observed values by greatly over-predicting emissions, over-predicting trans-
actions, completely missing the expirations of permits, and over-predicting permit
prices by a wide margin. This comparison is shown in tabular form to highlight
the discrepancies that set the authors on a long and involved research quest to
determine what imperfections in the actual market design brought about these
discrepancies.
Experimentation with several variations of the model did not improve the
predictions. A survey of other efforts by other researchers to model the VOC
market and prepare forecasts led to the discovery that similar wide discrepancies
had been made. Initial errors in forecasting SO2 permit prices had also been made
by researchers studying that market, but these errors were later corrected after the
discovery that low-sulfur coal prices were lower than expected (Joskow et al.
1998: 668–685). Clearly, the VOC market was responding to constraints on
Introduction 9
market incentives. One of the objectives of this book can now be further defined;
it will be to identify these constraints and to determine whether the market can be
redesigned to bring into play the decentralized incentives that appear to have been
seriously impeded. This research requires a broader approach and more inclusive
framework or model than the ones used by researchers so far. It will also open a
window on what worked and did not work in the cap-and-trade market, and reveal
where redesign may be most productive.
Explaining market performance

While keeping in mind the normative theory of emissions trading and its impor-
tant conclusions about cost savings and flexibility, when a well designed market
is working effectively, the authors turn in Chapter 6 to a wider framework of
analysis that enables the research to consider constraints impeding the market.
The theoretical model continues to provide a benchmark of performance against
which the authors can consider various deviations.
The economic literature has worked out many of the consequences of the failure
of assumptions to hold in an abstract model of the standard sort, and these provide
the logical starting place to consider possible reconciliation of market results with
predicted outcomes. Among these problems are high transactions costs (Stavins
1995: 137–148) that can limit trading and the advantages of market incentives, or
the lack of competition that can cause the market to fall short of performance
goals (Hahn 1984: 753–765). We review available evidence on these matters and
find little that would support these failures of the assumptions to hold.
Another possible explanation is that both the regulated and regulating commu-
nities initially lacked essential information to make the market function as
expected, a variety of learning behavior theory. The authors carried out a careful
review of the preparations for the start of the market, including the training
sessions and discussions among all concerned communities. The authors also
considered the trends in data over the first years, which provided little evidence
in support of this explanation. Rather than the lack of information, it may be
conjectured that emitters, well informed about market incentives, were led to
search for and introduce emission controls, thus leading to low control costs and
prices. However, the survey reported in Chapter 6 indicated that few if any new
control technologies were installed. The excess of tradable permits and their low
price provided little incentive for control measure innovations.
Turning to external constraints, the authors devised a broader framework or
model within which statistical tests of hypotheses could be formulated and imple-
mented. One frequently mentioned hypothesis was that the recession affected the
region in 2001 with a subsequent decline in output and emissions. The authors
constructed a variable measuring the decline in emissions that could be attributed
to the recession and found it to have marginal significance in equations with
permit transactions as the dependent variable. Emissions continued to decline
after the recession ended. Thus, there is little support for the recession hypothesis
as a major factor in explaining the unexpected results.
10 Introduction
An alternative candidate was the suggestion made by IEPA officials in a
meeting in 2003 that there was probably an over-allotment of permits in relation
to benchmark emissions. One variable constructed to measure extra permits
turned out to have limited significance in equations with transactions as
dependent variables. In addition to this finding, the authors’ objection to the
over-allotment hypothesis is that emitters did not increase emissions by relaxing
control measures and use their excess permits to cover this increase.
The hypothesis explaining the puzzling results that survived the most critical
assessment was that the continuance and extension of traditional regulations
greatly weakened market incentives and impeded the cap-and-trade program.
This was an unexpected effect as during the design phase the IEPA heralded this
unique feature of the program, stating that it combined two regulatory systems
each of which would offset the limitations of the other. The authors’ finding
was that traditional regulations, when combined with such market design deficien-
cies as a small reduction in emissions and a short, one-year banking horizon, greatly
diminished market incentives. That is, to put it starkly and clearly, traditional
regulations were binding on most participants in reducing emissions rather than
the cap-and-trade market. In effect, there were two policy instruments designed
to achieve the objective of reducing emissions, and one became redundant.
A variable constructed to measure this effect of traditional regulations proved
highly significant in equations explaining tradable permit purchase and sale
transactions in all the years for which data are available. The variable also was
significant in equations explaining emission reductions, the large banks, and the
associated expirations of tradable permits. A detailed description of these results
and the statistical methodology is provided in Chapter 6. Discovery of this result
is explored and tested in detail in this chapter as it opens up many avenues for the
proper design of a market for control of VOC emissions and other substances,
such as carbon dioxide. It also opens up many avenues for the redesign of the
Chicago program and provides direction for other urban areas considering this
new regulation.
Hot spots, spikes, and emissions trading

Among the contentious issues influencing the design of the market were the
questions of hot spots, local sub-area or neighborhood increases in emissions due
to trading, and spikes, increases in emissions over one or more years due to bank-
ing. These problems were frequently raised by environmental groups during the pre-
market dialogue meetings, and on occasion raised as reasons for not using a
cap-and-trade market. The Los Angeles region experience was often in the back-
ground of the Chicago dialogue. In the Los Angeles region, an earlier attempt to
establish a cap-and-trade market to reduce emissions of Reactive Organic Gases
(the Los Angeles equivalent of VOC emissions), under the acronym of RECLAIM
(the Regional Clean Air Incentive Market), was reported to be stymied in large part
by local group protests against enforcement rules, toxics, and hot spots (Lents 2000:
221). The IEPA had sent staff to the South Coast Air Quality Management District
Introduction 11
in the region, an agency that managed RECLAIM, to review this past history. The
staff was well aware of the potential risk of protests against the Chicago program.
In a decentralized system without emission ceilings established by traditional
regulations, it is clearly possible for trading to increase sub-area emissions over
benchmark values, and for spikes to occur. Even with traditional regulations such
increases could occur either because participants had been below their prescrip-
tive ceilings in a prior period and subsequently increased emissions, or because
new participants had moved into the sub-area. Or both developments could occur.
New entrants into the market are usually not assigned allotments of permits; they
must buy them in the market to cover emissions.
The phrase “Environmental Justice” was introduced into this problem area by
some observers noting that the sub-area or neighborhood could be the residence
of low-income or minority groups and thus adversely affected by the hot spot. It
could be pointed out that any income or ethnic group in a neighborhood could be
so adversely affected, but the counter is that lower income groups would have
fewer resources to deal with the problem.
The IEPA attempted to meet the issues head-on by promising to make sub-area
data on emissions and trades available for each trading season. Consequently, the
annual performance reports contained township emissions data compared season
by season. Very few townships revealed emission increases over baseline values,
and the few that did were in outlying areas affected by large installations with few
residents. With respect to spikes, the season-to-season aggregate data reveal
declines in total emissions. The issues have dropped out of sight.
In our studies, the authors carried the matter further by obtaining data on
smaller geographic areas. Making use of emissions data by participant, provided
by the IEPA, and making use of a geographical information software package
(ArcView ® GIS), the authors found hot spots when data were plotted by zip
codes, a US Postal system area designation more equal in population than area.
These codes, where emissions exceeded baselines, again were primarily in outly-
ing areas with small populations or in areas with a single large emitting firm.
Being unable to secure participant data for other years, the authors devised a way
of translating transactions of permits into enterprise emissions and thus plotting
zip code emissions for later years. These results show the potential for hot spots
but do not indicate definite cause for concern at this time. Details on the methods
and results are presented in Chapter 7. These studies do not assure that hot spots
or spikes will not occur in future years, so the research should continue. It should
be noted that hot spots are much less likely to occur when appreciable reductions
in pollution are required by the cap.
Banking horizons of tradable permits: an

experimental approach
Governments rarely have the luxury of experimenting with new designs by
changing one feature and testing these changes over future years. The experience
of other cities and countries could provide some guidance, but the Chicago VOC
12 Introduction
approach was a pioneering effort. Furthermore, such comparisons rarely reveal
the consequences of changing specific features of a complex system like a
cap-and-trade market.
An approach devised to circumvent this problem was to employ experimental
economics in which simulations of alternate designs could be tested in a
laboratory setting. Representatives are selected to act as traders with varied char-
acteristics, such as costs, and with stated objectives, such as cost minimization.
Variations in design can then be tested and compared for their consequences for
emitters, and market outcomes can be compared with traditional regulations. A
main feature singled out for redesign was the one-year banking horizon.
Experiments indicated that the performance of the market could be improved by
increasing the permit life after issuance. These results are reported fully in
Chapter 8 and were of value in formulating our policy recommendations.
Conclusions and policy recommendations for

market redesign
This book is a detailed description of a complex innovative regulatory approach
to reducing stationary-source emissions of VOC and the varied expectations and
hopes for the performance of the program. It must be confessed that the authors
were among those observers with high expectations and ready to find, at best,
minor difficulties that could be readily fixed. They now find themselves among
the growing body of observers who believe the program will not right itself in the
future without significant redesign. Such a belief can be a motivation for the
research effort required for the redesign of a valuable regulatory tool adapted to
a serious urban air quality problem.
The problems should be kept clearly in mind: they are the startling reduction
of emissions far below the benchmark and the required cap reduction, the
few transactions, the excessive banks of permits no matter how one tries to
rationalize them, the unexplainable expirations of valuable permits, and the low
and downward trend of prices of permits with no relation to marginal control
costs. Any estimates of cost-savings and flexibility gains of the market would be
far below the potential as pointed out by the following questions.
1 How could a market induce substantial cost savings with so few transactions?
2 How could the market induce control measure innovations when permit
prices were so low and when most participants held excessive permits soon
to expire?
3 How could the market induce wise allocation of costs over time when the
banks of permits were so large that most of them would expire?
4 How could the market induce flexibility in participant choices to reduce
emissions or trade or bank when the pressing problem for most of them was
how to dispose of huge banks of nonsalable permits?
In a review of the findings reported earlier, the authors first considered

problems within the market, such as transactions costs, information failures, or
Introduction 13
imperfections of competition, and found that these causes had small or
no effects. Further training of account officers at participant firms, and
improvements in the details and frequencies of price postings, could help in a
redesigned market. The lack of any significant broker activity was a clear
demonstration of the market’s design deficiencies. Getting brokers interested in
the market and adding to liquidity will require redesign of a number of the
market’s features.
Next to be considered were external constraints, such as the recession that
occurred during the first two years and the possible over-allotment of permits.
External constraints contributed little to an explanation, when examined in the
light of statistical information. A major finding that stood up well under quanti-
tative scrutiny was that traditional regulations were binding, and seriously weak-
ened market incentives. The cap-and-trade market was window dressing in the
sense that it attracted attention up front as a pioneering regulatory effort while
behind the scenes, traditional regulations were doing most of the work. If the
advantages of a market system are to be achieved, the question is how to free it
from the fetters of centralized regulation.
One benefit that might be claimed of the market incentive program was the
decline in confrontation between regulating and regulated communities: the for-
mer because emissions were dramatically reduced, thus contributing to cleaner air
to the satisfaction of the political leadership and the public, and the latter because
government monitors were not as frequently at the door. Serious issues, which
were rarely raised, were the real causes of the emission reductions, the cost-
savings and flexibility not being realized, and the cost of administering an imper-
fectly designed program, both in staff time and related expenses. This book raises
these issues in the hope that redesign can be achieved, that the benefits of
emissions trading can be realized, and that the redesigned program can offer a
choice to other urban areas.
Several general redesign options should be considered in any thorough review.
Eliminating the cap-and-trade market would get rid of the administrative costs of
the program that surely exceed by any measure its present benefits. This policy
option would receive the approval of many of the environmental groups and
probably some of the government regulators. It would disappoint many of the
business participants and most academics. It is not clear how the increasing
marginal control costs and increasing confrontations brought about from relying
solely on traditional regulations are to be avoided, especially in view of the further
reductions of VOC emissions required by the new ozone standards. Failure of
this pioneering effort would not be an encouraging signal to efforts to make use
of market incentives for VOC control in other urban areas, many of them in
developing countries.
A diametrically opposed policy option would be to eliminate or reduce tradi-
tional regulations by redesigning the market with new features, such as a greatly
reduced level of emissions (a much tighter cap) and a lengthened permit-banking
horizon. Alignment of opponents and supporters to relaxing of VOC traditional
regulations would be the reverse of dismantling the market system. It would
almost surely be a contentious issue and engender a long-lasting debate.
14 Introduction
The authors develop different and specific policy options, based on findings
and results of this study. Foremost would be a more stringent cap and a length-
ened banking horizon on permits. Determining a new cap in light of the new
eight-hour ozone standard is an important task for the IEPA. To assist in this
effort, the authors carried out a regression analysis of daily ozone concentrations,
weather conditions, and precursor concentrations during the hot summer of 2005
in the nonattainment area. These data open up new areas for research, including
the range of reductions in VOC emissions (the cap) that could be required to
achieve the new standard. Determining a new banking horizon or shelf life of
the tradable permit is an equally important task. Experimental trials led to the
conclusion that lengthening this shelf life could bring about cost savings and
reduce the expirations of permits encountered with a one-year life after issuance
of the permit.
In other areas, additional account officer training, encouragement of broker
activity, and fine-tuning of the provision of price information could enhance the
workings of the market. The authors propose a tradable permit or ATU sources
and uses table in sufficient detail to track and quantify each type of market trans-
action. Such consistent information would greatly facilitate analysis of annual
and inter-temporal market activity.
This redesigned market system could be combined with existing traditional
regulations to help in achieving the new air quality goals with gains in cost
effectiveness, flexibility, and lessened confrontation. Traditional regulations
would become binding only when hot spots were revealed or inter-temporal
emission spikes threatened. Such a better-integrated dual system might not enable
the cap-and-trade market to achieve its maximum gains, but improvements in the
performance of the market should be demonstrable shortly. Such a redesigned
system would continue to have two policy instruments, each designed for a
different objective.
What the authors propose is not a blueprint for a successful redesign of the dual
system, but rather a recipe for varying the features of the market system so as to
achieve more effective outcomes in terms of air quality and decentralized control
cost reductions. Such a recipe could prove helpful for other urban areas design-
ing market systems to reduce air pollution, by allowing them to incorporate their
own preferences and make allowances for the local environment.
2 The political economy of the
Chicago market design
Introduction
Introducing a pioneering, even radical, regulatory innovation on top of a
long-established, tested, and traditional set of ozone control regulatory measures,
which many believed should be extended instead, is not a trivial exercise in
environmental governance. This chapter describes the setting for this action,
including information on the local health impacts of urban ozone, the contending
views on design of this innovative regulation, the subsequent compromised
design, and the resulting hopes and expectations as the new regime was launched.
The actual performance of the first years of this new regulation is described in
Chapter 3.
Health and welfare motivations for market

incentive regulation
The Chicago region was previously classified by the US Environmental
Protection Agency (US EPA) as a severe ozone nonattainment area. This classifi-
cation arose from the 1990 US Clean Air Act Amendments (CAAA) and is based
upon the number of seasonal episodes of high concentrations of urban ozone that
adversely affect human health and visibility. A severe classification carries with
it the information that concentrations of urban ozone have equaled or exceeded
the one-hour standard of 120 ppb. It also carries with it significant mandatory
requirements for regulatory actions at the federal, state, and local levels, and the
timing of such actions. It was long recognized in health research that low-level
ozone had adverse effects over a wide range of concentration values (Spengler
1993: 121). After lengthy public comment and litigation, a new, eight-hour
standard of 85 ppb was introduced by the US EPA to replace the old standard. The
Chicago region is currently classified as a moderate ozone nonattainment area
under the new standard. Most of the mandatory requirements carry over from the
prior standard.
The Illinois Environmental Protection Agency (IEPA) is charged with preparing
a state implementation plan, subject to federal agency approval, and due in 2007,
that will demonstrate how attainment will be achieved by 2010. Attainment
16 The political economy of the market design
requires no exceedances above 85 ppb over a three-year period. If attainment is
not reached by 2010, the region may be “bumped” to a level demanding more
stringent controls. The hot summer of 2005, with the chemical mix of volatile
organic compounds (VOCs) and nitrogen oxides (NOX) atmospheric concentra-
tions, brought about a number of violations of the new standard, indicating that
much work lies ahead. The authors give their detailed views in Chapter 9 on how
the cap-and-trade market can be redesigned to help achieve attainment.
To return to the national legislation, there were clear signs that the Congress in
1990 was impatient with the progress obtained in improving air quality under
prior legislations, such as the 1970 Clean Air Act that, among other features,
established the US EPA and listed six criteria pollutants, including emissions of
VOC and NOX, precursors of low-level ozone. That 1970 act also set a five-year
goal for significant progress to be achieved. While some improvements in air
quality were discernible, research into the health and visibility costs of air pollu-
tion indicated that sufficient progress had not been achieved in VOC and NOX
emissions in the 20 years since 1970, not to mention during the five-year interval
1970–5. While lead emissions were dramatically lower, and carbon monoxide (CO)
and sulfur dioxide (SO2) emissions were considerably lower, other pollutants
revealed smaller declines and low-level ozone concentrations were essentially the
same (US EPA 2003:11).
The VOC and NOX concentrations make up only some of the constituents of
urban smog, which is a mixture of pollutants, many highly correlated with each
other. Over 3,000 chemical substances have been identified in ambient air,
including anthropogenic originating SO2, CO, NOX, lead, total suspended partic-
ulate matter, oxidants (including ozone, O3), and nonmethane hydrocarbons (a
subset of VOC). Some of these chemicals are allergens, others irritants, and yet
others pathogens that all contribute to mortality, morbidity, and other physiologi-
cal responses extending over a wide range of pollutant concentrations (Spengler
1993: 123). Identifying each constituent as a cause or marker for a specific dis-
ease has proved to constitute difficult research that is still very much underway.
The composition of urban smog varies markedly among urban areas so that
each urban area requires separate monitoring and analysis of the characteristics,
causes, and severity of its smog problems. Los Angeles, for example, has signif-
icant emissions from the petrochemical industry but hydrocarbons in the air are
mainly from mobile sources. Houston has significant emissions from mobile
sources but hydrocarbons in the air are mainly from the petrochemical industry.
Chicago provides a good case study of a typical mix of these constituents and a
common proportion of sources (Tolley et al. 1993: 10).
What can be concluded about ozone exposure is that it can cause irritation to
lung airways and destruction of living tissue. Continuing exposure can lead to
loss of lung function. High ozone concentrations are associated with restricted
activity of sensitive people, asthma symptoms, respiratory admissions to hospi-
tals, and an increase in daily mortality (Schreder 2003: 1–120). A study of the
impacts of ozone concentrations in Los Angeles and New York City suggests that
a tripling of ozone concentrations from 50 to 150 ppb can be expected to increase
The political economy of the market design 17
daily mortality from 3 to 4 percent (Kinney and Ozkaynak 1991: 99–120). As new
research reveals the extent of these damages, the number of people living in com-
munities with high levels of ozone has remained relatively constant. Under the
revised, eight-hour standard of 85 ppb now being implemented, close to 150 million
people live in communities where ambient air quality exceeds that level on an
episodic basis (US EPA 2003: 1). In the Chicago region over 8 million people are
exposed to episodic ozone concentrations above that level.
Obtaining monetary estimates of the damages to health caused by ozone would
provide an important part of a benefit–cost analysis. Such estimates are as yet
uncertain and the likelihood of their being underestimated has led legislators in the
past to prohibit using such estimates in devising regulatory measures. However, the
advantages of a benefit–cost analysis are very evident in an area such as Chicago,
where the marginal control costs of additional reductions are increasing. As a con-
sequence, more attention is being paid to obtaining credible damage reduction data.
A careful study of the Chicago Metropolitan region provides valuable guidance on
the damage reduction that would result from lowering the ozone concentrations
from 190 to 120 ppb, the latter being the prior, one-hour standard. These damages
include restricted activity days (RADs), respiratory symptoms, and asthma attacks.
As the authors have mentioned, the adverse effects extend over a wide range of
concentrations in approximately a linear manner so the data of Table 2.1 provide a
valuable insight into the benefits of ozone and precursor reductions.
Valuable as the table guidance is, it provides only a partial list of monetary
estimates. Mortality consequences are not estimated and would increase the totals
appreciably (Burtraw et al. 1997: 1–40). Further damages result from hazardous
VOC hydrocarbons, such as benzene and other smog components with particulate
matter that can carry cancer-inducing substances deep into the lungs. Smog also
affects visibility in many urban areas, a problem that many residents are willing
to pay to reduce (Thayer 1998: all pages referenced).
Reducing these damages produces a stream of welfare benefits extending into
the future, offset in part by the control and regulatory costs of lowering emissions
Table 2.1 Ozone morbidity damage reductions obtained by reducing ozone concentrations
(from 190 to 120 ppb)
Reduction in Value per case Total damage

millions (in 1989 dollars) reduction
of cases ($000,000)
Mid-range estimate, total 26.80 NA 348.33

Respiratory symptoms 15.83 6.00 94.98
Restricted activity days 10.10 22.5 227.25
Asthma attacks 0.87 30.00 26.10
Source: Adapted from Tolley (1993: 14).

Note
The authors also give low and high estimates of total damages that range from a total of $68 million
to $1.1 billion.
and hence ambient concentrations of pollutants. While the total benefits of such
reductions would appear to exceed any reasonable estimate of control costs, the
body of knowledge of these costs is even more sparse than the benefits of damage
reduction. The reasons for this lack of knowledge will become more apparent as
the authors detail the variety of sources of emissions and the wide range of control
measures in later chapters. Despite the sparseness of information on control costs,
enough is known from engineering and spot surveys to establish that marginal
control costs have been increasing since 1970 in addition to the expenses of
confrontation between regulated and regulating communities, and the expenses of
administering complex on-site traditional regulations (IEPA 1996: 1–69).
The regulatory options

The variation in control costs, depending upon the amount of reduction of ozone
concentration to be achieved, was recognized under Title I of the 1990 CAAA that
specified a five-fold classification of urban areas by the extent of air pollution. The
legislation spelled out an escalating set of regulatory measures for each classifica-
tion, together with a date for reaching attainment of air quality ambient goals.
Ozone concentrations derive from VOC and other precursor emissions under cer-
tain meteorological conditions and are not emitted directly. The relationships
between emissions and concentrations are not exact, depending on the composi-
tion of emissions and climate conditions, but are sufficiently correlated for the
public agencies to focus on emissions for regulatory purposes. Not unimportant in
this connection is that emissions from specific sites are much easier to regulate.
Reductions in VOC emissions were to be secured among stationary, mobile,
and small area sources: stationary sources included factories, large retail estab-
lishments, refineries, and government enterprises, while small area sources
included certain engines on lawn mowers and motorboats. Regulatory measures
were specified for each type of source, depending upon the severity of the ozone
concentration problem. Selected measures for stationary sources relevant to this
study by urban area classification are listed in Table 2.2. Mobile and small area
source reductions were to be achieved by such command-and-control measures as
requiring reformulated gasoline to reduce emissions per vehicle mile, enhanced
vehicle inspection to reduce the number of high-emitting vehicles, and the
elimination of two-stroke lawnmowers.
Only Los Angeles was included in the extreme category; Chicago and Houston
were among the urban areas included in the severe group. While market incentive
programs were not mandated by the federal legislation for VOC reductions and
ozone problems, in contrast to the sulfur dioxide program, they were among the
contingent measures that were optional for state and local decision. For local and
state officials concerned about attracting new enterprises to their area, there were
clear incentives to design programs to move to less demanding categories as fast
as possible by reducing the number of ozone episodes.
Noteworthy among the requirements is the development of a more reliable
emissions inventory both for VOC and NOX emissions some 20 years after
Table 2.2 Requirements for ozone nonattainment areas
Classification Selected regulatory requirements for Attainment

stationary-source emitters deadline for all
measures
Marginal Emissions inventory due in 2 years, Reasonably Nov. 15, 1993

Available Control Technology (RACT) on VOC
modifications due in 6 months, New Source Review
(NSR) requiring best control technologies due in
2 years
Moderate All of the above plus future RACT on major sources Nov. 15, 1996
due in 2 years
Serious All of the above plus contingency measures including Nov. 15, 1999
market incentive programs if progress is not achieved
NSR required on modifications to existing plants
Severe All of the above plus fees on major sources if Nov. 15, 2007
attainment is not achieved
Extreme All of the above plus clean fuel requirements for Nov. 15, 2010
Boilers–plan due in 3 years
Source: Adapted from Calcagni (1993: 190).

Note
New source review applies more stringent controls to new or major modifications of existing emission
sources.
the 1970 legislation. During the period, “little attention had been paid to
developing a credible database” (Calcagni 1993: 191), which clearly must play a
key role in measuring progress toward the air quality goal and in laying the foun-
dation for any market-based incentive scheme. Achieving that database had
proved a challenge involving more expense and effort than anticipated. The
challenge remains to this date, despite some progress. The difficulty is indicated
by the fact that no state had completed the database in any satisfactory manner
two years after the 1990 Act.
Making US environmental policy is neither a simple nor always a transparent
process. The federal and state government elected branches are clearly active and
important participants, together with the US EPA, as in the 1990 CAAA. The
50 environmental agencies in the states play active roles in regulatory implemen-
tation and in certain discretionary areas, such as the choice of a cap-and-trade
decentralized approach. Having so many government agencies involved in policy
making and in implementation has been criticized as having “too many cooks in
the kitchen” and increasing opportunities for evasive lobbying. It has also been
praised as furthering experimentation and strengthening policy selection.
The eight-hour standard was initiated in the first instance by the US EPA under
legislative authority to set requirements in terms of health considerations, and
the initiation withstood challenges in the federal courts. As the authors have
mentioned under the new standard, each urban area was classified, or reclassified,
in terms of concentration data; the Chicago area, unchanged in spatial dimen-
sions, was reclassified as a “moderate” nonattainment region in June 2005.
Table 2.3 Urban area classifications for the eight-hour ozone standard
Area class Eight-hour design value Maximum period for Emissions

(ppb ozone) attainment dates inventory
in state plans
Marginal From 85 up to 92 Up to June 03, 2007 Required

Moderate From 92 up to 107 Up to June 06, 2010 Required
Serious From 107 up to 120 Up to June 15, 2013 Required
Severe From 120 up to 187 Up to June 15, 2021 Required
(in two sub-classes)
Extreme Equal to or above 187 To be determined Required
Source: Adapted from US EPA 2005 http://www.epa.gov/ozonedesignations/ozonesample

requirements.htm (accessed June 18, 2005).
The option of redesigning the cap-and-trade market remained very much on the
state’s agenda given the reductions in VOC emissions that would be required. The
agency has stated, “Further VOM reductions will be needed to meet the new stan-
dard, and the ERMS program is expected to have a role in obtaining those reduc-
tions” (IEPA 2003: 2). VOM stands for volatile organic material, which is
equivalent to VOC, and ERMS stands for the Emissions Reduction Market
System. Thus, an opportunity has been created to redesign the market in ways
more compatible with traditional regulations and more consistent with the new air
quality goals.
The authors have prepared a summary Table 2.3 that specifies the eight-hour
ozone levels not to be exceeded and the new attainment dates required for state
implementation. Reasonable further progress is required for each urban area clas-
sification; for example, Chicago should achieve a 15 percent reduction in VOC
emissions from baseline by no later than 2008 and attainment by no exceedances
over the prior three years now to be reached by the later date of June 15, 2010.
Several requirements are relaxed for moderate nonattainment areas compared to
severe categories, such as tests of vehicle emissions by basic inspection and main-
tenance measures rather than enhanced inspection and maintenance, the latter
involving longer tests of vehicles on rollers with the motor running. Other
requirements carry over by and large from the one-hour standard, including the
option of utilizing market incentive programs. Moderate nonattainment areas run
the risk, as do other areas, of more stringent classification if ozone concentrations
increase beyond the threshold or design values.
The cost-effectiveness motivation for market

incentive regulation
The difference between a decentralized market incentive system, especially of the
cap-and-trade variety, and a centralized, traditional or command-and-control
regulation for most plausible cases is wide and deep. In one, the decisions at
the enterprise level to emit, to reduce emissions by control technologies, or to
manage a portfolio of tradable permits is made under the reasonable assumption
that the goal is to minimize control costs. The government designs market rules,
monitoring and enforcement, but steps back from making control choices on the
control front line. In the other, the government determines acceptable rates of
emissions or pollutant content of inputs, often with specific control technologies
in mind that are uniform across all emitters, and then calls on the appropriate
level of government to implement, monitor, and enforce the controls.
Under traditional regulations, the government, together with the enterprise,
must be on the control front line with all that implies about the number of staff
and the opportunities for confrontation. Only in the unusual case in which each
emitter has identical control measures or in the case of very deep emission
reductions required will the two regulatory systems approach each other in cost-
effectiveness. The authors will have much more to say about these two systems
shortly, but a brief general history will be valuable at this point in setting the stage
for the Chicago approach.
Traditional regulations, it is fair to say, dominated the regulatory scene and
discussion until about the mid-1990s, being specified in earlier national and state
legislation. They were applied to air, water, and land pollution control, where the
goals were a certain quality level such as air pollutant emissions or ambient air
concentrations. More detail on the importance of these traditional regulations on
the VOC market is provided in Chapter 4. Economists, on the other hand, had
a record of studies purporting to show that many such regulations were cost-
ineffective and could be bettered from a cost standpoint by incentive regulation,
such as emissions trading (Stavins 1998: 69–88). These studies appear to have
had much less influence than the mounting evidence on control costs.
The US EPA was aware of this problem and experimented after 1970 with a
cautious, tightly-controlled emissions credit trading program in selected areas for
selected pollutants requiring pre and post-approval of trades that had to meet
strict measurement requirements (Tietenberg 2002: 278). Few trades were carried
out in the light of these heavy transactions’ costs. California led the way in the late
1980s in developing a less restrictive cap-and-trade approach in the Los Angeles
area in an effort to reduce local urban smog constituents, such as NOX and sulfur
dioxides (SOX), under the rubric of a Regional Clean Air Market plan
(RECLAIM). Under this program, the pollutant control decisions of utilities and
other large emitters were more completely decentralized (Lents 2000: 237–238).
These two markets were the first of their kind and attracted wide attention. An
attempt to design a cap-and-trade market for VOC emission reductions ran into
strong opposition and was aborted for reasons the authors will describe. The
RECLAIM markets provided an example that stimulated further studies and
discussion, including the path-breaking US CAAA of 1990.
The 1990 national legislation specified among other features a cap-and-trade
market for reducing SOX emissions by about half in two stages for the nation as a
whole. Coal-burning electric utilities were most affected. The political economy of
the legislation has been well described in several studies (Ellerman et al. 2000).
Several features of this market are highly relevant for our purposes. SO2 emissions
were accurately measured for the most part by continuous electronic monitoring in
smokestacks. This system permitted real time monitoring by the US EPA. The
legislation called for a reduction of almost half of historic emissions (the cap) by
allotting tradable permits to individual emitters, based on their own historical
emissions after some adjustments. Tradable permits could be traded, used to cover
emissions by returning permits to the government, or banked indefinitely.
It is important to note that given the current enthusiasm for market incentives,
the 1990 legislation initially was not greeted with broad applause, and passed the
US Congress by a small margin. The affected business community was largely
opposed or indifferent. For example, the Edison Electric Institute, an organization
of electric utilities, did not buy into the allowance system and trading at the start
(Rosenberg 1997: 97). The system was supported by the US EPA, many economists,
and an influential environmental organization, then called the Environmental
Defense Fund. The latter may have had important political significance among
elected officials.
Traditional regulations had been the dominant measures chosen to reduce local
VOC and NOX emissions in the Chicago region, although questions were being
raised in the early 1990s about the mounting costs and the slow progress in
reducing emissions. The functioning of the RECLAIM markets and the growing
recognition that the SO2 cap-and-trade market was effective added further
motivation to seek alternative courses of action.
The first effort proposed by a small leadership group within the IEPA was to
develop a cap-and-trade approach to reducing local NOX emissions (Gade 1993:
4–8). Apparently, this was due to the feasibility of designing a market to cover the
relatively few companies with large boilers, giving rise to more easily measured NOX
emissions and to the earlier unsuccessful effort to use this market system to reduce
ROGs, as VOC are called, in Los Angeles. There a number of businesses had strongly
protested the emission baselines proposed and the allotment of tradable permits. At
the same time, environmental groups had expressed deep concerns about hot spots
and inter-temporal emission spikes that could result from autonomous and
anonymous trading decisions. In the face of this opposition, the VOC cap-and-trade
market was abandoned and traditional regulations continued (Lents 2000: 221).
An unforeseen complication to this early Chicago plan arose from air shed
modeling work of the Lake Michigan Air Director’s Consortium, made up of
states bordering on the lake, that revealed that incoming concentrations of NOX
from other states were very high. This regional movement of NOX concentrations
called for a regional or national research and regulatory effort that was later
implemented (Ozone Transport Assessment Group 1997: 57). The IEPA then
turned to the development of a VOC cap-and-trade market that was to be a
pioneering venture into a much more difficult and complex market design and
implementation process.
The VOC emission sources are ubiquitous and highly variable, arising from
industrial solutions, paints, combustion processes, various inputs and the like,
most of which could not be monitored by the kind of continuous electronic
monitoring that was used to measure and monitor SOX emissions from
smokestacks. Instead, reliance was placed on VOC emission rates from particular
processes and control technologies and from purchase records of inputs. As an
aside, it should be noted that emissions from mobile and small area sources were
even more difficult to measure. Such hurdles at the emitter level would clearly
affect the availability of aggregate data. Not only emissions but also ambient
concentrations of VOC, NOX, and ozone molecules in the atmosphere proved
expensive and difficult to measure accurately. A collaborative effort by states
bordering Lake Michigan carried out studies attempting to close these gaps, but
it did not have the formal agreement of the Northeast states to form a commis-
sion to develop an emissions inventory and to carry out control measures (Ozone
Transport Commission 1998: 2–1 through 2–3). A step toward more information
was obtained by setting up a number of ozone-concentration monitoring stations
around the state and in the nonattainment area.
The VOC emissions data remain subject to uncertainty, some of it inherent. The
1990 CAAA operating permit or authorization required detailed information
from individual emitters on processes and inputs, giving rise to pollutants and
contained provisions for reporting annual emissions based upon emission rates or
factors from processes and VOC content in inputs. These authorizations were the
basis for IEPA determination of baselines and allotments. They were incomplete
in a number of respects. Besides the issue of accuracy, there were omissions, such
as the reporting of hazardous air pollutants (HAPs) emissions and separate
reporting of seasonal emissions. A separate report on HAP emissions was not
required until 2001 and then only for a subset for which standards had been deter-
mined. Seasonal emissions from May through September, as distinct from esti-
mates based on annual values, were required just before the start of the market in
2000. The matter of uncertain emissions data poses problems for any urban area
planning a market incentive system to reduce smog, as it includes not only VOC
emissions but also particulate matter.
It was not only the difficulty of obtaining reliable emissions data, but also the lack
of knowledge about, and experience with, VOC cap-and-trade markets that occupied
the IEPA. These market incentive systems were permitted but not specified by the
1990 legislation, unlike the SO2 market. Thus, there was little guidance on what
the detailed features or design of a cap-and-trade market should look like. The failure
of the Los Angeles attempt was hardly the information desired by the IEPA.
The market design dialogue and decisions

The first administrative steps were to hold large forums, inviting comments on
the proposed VOC market system and asking interested groups to participate
in an on-going dialogue about the design features of the VOC cap-and-trade
approach. Such large emitters as a BP Amoco Refinery, Caterpillar, Abbott Labs,
and Corn Products agreed to participate in the dialogue. Small emitters were
represented through the Illinois Chamber of Commerce. Environmental groups,
such as the Citizens for a Better Environment and the Chicago branch of the
American Lung Association, joined the effort. Notably absent, because they
lacked local chapters, were the nationally important Environmental Defense
(Fund) and the National Resources Defense Council, the former having played a
major role in support of the SO2 market. The authors were asked to participate as
academics. The regulatory community, in addition to the IEPA, was represented
by the regional office of the US EPA. Needless to say, there were contending
views on the specific features of the market that were debated over a long period
of time, requiring postponement of the start-up date until 2000.
There was little discussion of the use of pollutant taxes rather than emissions
trading. In circumstances of full information and certainty about market and
environmental outcomes, the two decentralized regulatory measures, pollution
taxes and emissions trading, can be shown to be equally cost-effective. In
circumstances of uncertainty, the slopes of the marginal cost and marginal benefit
functions can enter the decision and favor one or the other measure in terms of
achieving desired pollution reductions. These considerations played little or no
role in the public discussions. Taxes were unpopular with the business community
and the free allotment of tradable permits eased the resistance of that community
to the new program.
What resulted from the debate was a compromised market that the authors
describe feature by feature as a guide to an understanding of the anatomy of a cap-
and-trade market. This detail will also provide insights into the contending views
of interested groups. Most important, it will provide an introduction to the possi-
ble design deficiencies that resulted from the compromises made by the IEPA.
The authors emphasize that there were few precedents or guidelines for the design
of a local cap-and-trade market to reduce stationary source VOC emissions. The
agency was on the frontier is this effort. The major features and the decisions may
be summarized as follows (IEPA 1998: 3–4):
1 The benchmark of emissions, both aggregate and for individual emitters, is an

important design feature that must be determined within the geographic area
of concern, based on historical information or projected future information.
Obtaining accurate benchmark data is not a trivial exercise, and concerns
about accuracy were expressed by environmental groups and academics. The
IEPA final decision was to use the average of the historical period 1994–6 as
reported by emitters located in the six-county-plus-two-township Chicago
nonattainment area. The business community objected that that period might
not be representative for all firms, so substitution was allowed for cause in
the range 1990–7.
2 The reductions of the aggregate volume of emissions from these benchmarks
are measured by the cap that is determined by the government, taking into
account the desired improvement of air quality, and the support of emitters.
Typically, this essential design feature is negotiated, as was true in this case,
with the business community arguing for a small reduction and the
environmental community arguing for a larger one. The final IEPA decision
was a 12 percent reduction in emissions (an 88 percent cap) that should be
compared with the 50 percent reduction of historical SO2 emissions from
affected electric utilities. The small reduction required in the Chicago program
eased the resistance of emitters to the market system.
3 The allotments of tradable permits to individual emitters measured in units
of emissions that add up to the aggregate volume of acceptable pollution
must be determined by the government and either auctioned off or allotted
free to each enterprise, based on their individual benchmarks. Emitters
argued that the required, strict control measures for HAP emissions, a subset
of all VOC emissions, left them little leeway and added that many had made
important state-of-the-art improvements in controls under the stimulus of tra-
ditional regulation. The agency awarded permits in full rather than 88 percent
for HAP emissions and also for emissions controlled by state-of the-art tech-
nologies. These exceptions comprised about 18 percent of all VOC baseline
emissions and set an overall design reduction of about 10 percent (a 90 percent
cap). The academics argued for an auction, but the permits were allotted free
of charge in accordance with the wishes of the business community.
4 Government procedures for receiving and recording permits for measured
emissions from individual participants in the market and recording transac-
tions must be established in a way that inspires confidence on the part of
observers that emissions are being properly limited and the market is work-
ing as expected. In the Chicago program, no prior or post-approval was
required for a trade. VOC emissions and ozone concentrations are fund pol-
lutants, meaning they do not accumulate in the environment like lead or mer-
cury, but are gradually transformed into less harmful substances. They are
harmful in the transition and the agency’s data on emissions are important for
this reason, as well as for keeping informed on observance of market rules.
To assist in the tracking effort, the agency required that tradable permits be
numbered for measurement and recording purposes. Environmental groups
argued for separate reporting of HAP emissions due to their toxicity, but the
regulated community countered, and the IEPA accepted their argument, that
such reports would be difficult to obtain and expensive.
5 Permits may be traded, used to cover emissions, or banked. The horizon for
banked permits is a vital market design decision for the IEPA. The environ-
mental groups had been reluctant to support any banking, believing that
hot spots and inter-temporal spikes could result from banking, an important
issue in the Los Angeles controversy. The regulated community argued for
the inter-temporal control cost savings that could result if emitters could
bank for later use. The one-year horizon on tradable permits, that is, permits
were good for only one year after issuance, was a crucial compromise by
the IEPA whose consequences were not clearly foreseen at the time. This
decision was in stark contrast to the decision to have a long-lived SO2 permit.
Dated permits not used or traded by the end of the one-year period expired
without value. Future dated permits could be traded but not used prior to
that date.
6 The environmental community argued for subdividing the market into
smaller areas and denying trade across areas, in an effort to avoid hot spots
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"How is it," said Rose, "Mr. Ashley is not with you? Does he not
indulge in this gentle sport? or is he too tender-hearted? for it is
monstrously cruel you know!"
"Marmaduke is not calm enough in his temperament for anything so

sedate as fishing; and I doubt whether he would think much of any sporting
less exciting than a tiger hunt, or perhaps a boar hunt. What do you think of
him?"
"I don't think at all of him. In one evening I am not able to form an
opinion of any one; at least," checking herself, "not often. He didn't say
anything remarkably brilliant, did he?"
"Brilliant! No."
"The only part of his conversation I remember is what he related of you

and your side of bacon. I liked his manner of telling that. It was in a tone of
real friendship."
"Yes, Marmaduke has a regard for me. But don't you think him superbly
handsome?"
"I don't like handsome men."
This was said with perfect unaffectedness; but he raised his eyes
quickly, and gave her just such a look as she remembered him to have given
her once before, when they were talking of Leopardi, and it embarrassed
her. Indeed, said to an ugly man, this had an equivocal sound: it was either a
sarcasm or a declaration.
"You are singular, then," was his quiet reply.
"Why singular, in preferring brains to beauty? Are we women really, do

you think, the children we are said to be, and only fit to be amused with
dolls? That is not like your usual respect for our sex!"
"Come, come, you do not state the case fairly. The question is not,
whether you or your sex prefer beauty to brains, but whether you prefer
beauty to ugliness? It is curious to notice how this question is always
confused in this way, by mixing up with it an element that does not properly
belong to it. People say, 'Oh, a clever plain man before a handsome fool!'
and then argue, as if all the plain men were necessarily clever, and all the
handsome men imperatively fools."
"Well, I'm sure, handsome men generally are—not, perhaps, fools—but

certainly not clever; they think of nothing but their beauty. Their beauty—
the frights!"
"I cannot agree with you. Running over the list of great men you will
find the proportion greatly in favour of handsome men; which, when you
come to reflect how few handsome men there are compared to the
thousands of ugly men, is the more striking. The reason I take to be this:
these men, from their very intellectual greatness, must have had great
beauty of expression, so that with features a little better than ordinary they
would rank among the handsome. It may be said, indeed, that very fine
organizations include genius and beauty."
"Oh!" she replied, laughing, "if I once get into an argument with you,
you'll make out anything. But I won't be browbeaten by logic: 'hang up
philosophy!' as Benedict says. I'm as difficult to be reasoned out of my
convictions as if I were a logician myself. I don't like handsome men, I
have said it; nor shall you reason me into liking them."
"Very well, very well. I certainly have no cause to wish it."
"Except the love of victory in argument, eh?"
"The victory must be on my side; it is gained already. If two men equal

in talent and goodness, but greatly unequal in appearance, were placed
before you, the handsomer must excite the preference, and that is all our
cause of battle amounts to."
"Oh, men, men! how you will argue!"
At this moment they were joined by Marmaduke, who was all anxiety
about the private theatricals; not for themselves, but because he saw in them
an excellent excuse for being constantly at the Hall, and in Violet's society.
With his usual impetuosity Marmaduke had already settled that Violet
should be his wife. Love at first sight, which may be a fiction with regard to
the colder children of the north, is no fiction with regard to such passionate
natures as his; and he was in love with Violet, without seeking to disguise it.
Indeed, he spoke in such raptures of her to Rose, that she smiled and looked
significantly at Julius, who returned her glance, and confirmed her
suspicions.
CHAPTER X.
THE GREAT COMMENTATOR.

"Eccovi un de' compositor di libri bene meriti di republica, postillatori, glosatori,
construttori, additatori, scoliatori, traduttori!..,...
... O bella etimologia, e di mio proprio Marte or ora deprompta! Or dunque quindi
prope jam versus movo il gresso, per che voglio notarla majoribus literis nel mio
propriarum elucubrationum libro."—GIORDANO BRUNO. Candelajo.
During this conversation between the lovers, another pair of undeclared

lovers were standing on the steps of the terrace, "talking of lovely things
that conquer death," and yielding themselves up to the luxury of a tête-à-
tête, wherein glances were more eloquent than tongues, and hearts fluttered
like new-caught birds, at the most seemingly insignificant phrase.
These were Cecil and Blanche. I call them undeclared lovers, because
not only were they ignorant of each other's feelings, but ignorant also of
their own. Blanche's love had been of gradual growth. The lively,
handsome, accomplished Cecil had early made a deep impression on her,
though her shy, retiring disposition gave no signs of it; and his attentions on
the evening before had been so delightful that she was still under their
influence.
That in relinquishing Violet, he should turn to her complete opposite,

Blanche, is nothing but what one may have anticipated. Her charms were
brought into stronger relief by the contrast; and it has always been remarked
that the heart is never so susceptible to a new impression as when it has
been in any way robbed of an old affection. Partly, no doubt, because the
feelings are best attuned to love when in that state of unsatisfied
excitement; for,—
Say that upon the altar of her beauty

You sacrifice your tears, your sighs, your heart,
still, the sacrifice is so sweet, that it is with difficulty we forego it; and if the
object change, the feeling still remains. Partly, also, because the amour
propre, outraged by a defeat, is glad to be flattered by the chance of a new
success.
There they stood, enchanting and enchanted, when Meredith Vyner put
his head out of the glass door of the drawing-room which opened on to the
terrace, and said, "Mr. Chamberlayne, you are not doing anything particular,
are you?"
"Not at all, sir."
"Then, if you have nothing better to amuse you, just step with me into
my study; I have a new discovery to communicate, which will, I think,
delight you."
Nothing better to amuse him! to leave Blanche for some twaddle about
Horace! was it not provoking? But he was forced to go, there was no
escaping, If anything could have compensated him, it would have been the
expression of impatience on Blanche's face, and the look with which she
seemed to say, "Don't stay too long."
When they were in the study, Meredith Vyner placed his snuff-box on
the table, and, resting his left foot on the fender, began stroking his
protuberant calf in a very deliberate manner. This was a certain sign of his
being at that moment struggling with some conception, which demanded
the greatest clearness and composure, adequately to bring forth. His mind
was tottering under the weight of an unusual burden. As the left hand
slowly descended the inner part of his leg, from the knee to the ankle, and
as slowly ascended again the same distance, Cecil saw that he was
arranging in his head something of more consequence than a verbal
criticism. "The discovery I am about to impart," he said at last, with a slight
pomposity, "is not perfectly elaborated in my mind, since the first gleam of
it only came to me last night. It kept me sleepless. I have meditated
profoundly on it since, and I am now in a condition to communicate it to
you."
In spite of the solemnity of this introduction, Cecil, whose thoughts

were on the terrace, found great difficulty in assuming a proper air of
attentive interest. Vyner did not remark it, but continued:—
"The discovery is so simple when once mentioned—like all truly great

discoveries—that one asks oneself, is it possible that hitherto it should have
been overseen? It goes, however, to nothing less than the entire revolution
of the Horatian Sapphic. Look here: you must often, I am sure, have been
disagreeably affected by the absurdity of
Labitur ripa, Jove non probante,

uxorius amnis.
"This sort of caprice is very funny in Canning's
U.
-niversity of Güttingen;
but only tolerable in comic verse: in a serious ode it is detestable, and I

cannot believe so careful and fastidious a poet (who was no innovator,
recollect! none of your école romantique!) guilty of it..."
"You propose a new reading?" suggested Cecil, feeling called upon to
make some remark.
"New reading! no: that is the paltry trick of a commentator, who

endeavours to escape a difficulty by denying its existence. No, no; my
edition will have none of these trivialities. Everything I print shall have a
solid substance. I intend my edition to last. To the point, however; the
difficulty vanishes at once if we suppose, as is most natural to believe, that
Horace's Sapphics, were not composed of four lines but of three—the fourth
line being really nothing but the Adonic termination to the third—like the
tail to an Italian sonnet—or better still, like the lengthening of the
concluding line in the Spenserian stanza: which has a magnificent swing
and sweep in its amplitude, as if gathering up into its mighty arms the rich
redundancy of poetic inspiration. Thus instead of
Iliæ dum se nimium querenti

Jactat ultorem, vagus et sinistra
Labitur ripa, Jove non probante, u-orius amnis.
The verses read thus:—
Iliæ dum se nimium querenti

Jactat ultorem, vagus et sinistra
Labitur ripa, Jove non probante, uxorius amnis.
And so throughout. Does not the sweep of this last line carry a fine
harmony with it? Is it not incomparably superior to the mean, niggling,
clipping versification as we usually receive it? There cannot be a question
about it. And if you come to reflect, you will see how the error has crept in
by the copyists being cramped for room, and writing the Adonic addition
below, as if it were a new line. But it is no more a new line, than the
additional syllables in Spenser are new lines; nevertheless, we often see
printers forced to break a line into two. Here is an example," taking up a
volume, "which occurs in Tennyson, whom I opened this morning." And he
read aloud:—
"They call me cruel-hearted, but I care not what they say,

For I'm to be Queen o' the May, mother, I'm to be
Queen o' the May."
"There," throwing the book down, "now suppose a few centuries hence
all our literature to have perished, except half a dozen poets, some noodle of
a commentator will imagine that 'Queen o' the May' is a separate verse, and
will write learned twaddle on the versification of the English!"
An ample pinch closed this triumphant peroration; and Vyner holding

his head slightly downwards to bring his nose in contact with his finger and
thumb, looked up over that finger and thumb at Cecil, who had for some
minutes ceased to hear what he was saying, having caught a glimpse of
Blanche walking on the lawn with Captain Heath. Cecil disliked the
Captain; and now a vague sentiment of jealousy hovered about his mind.
No wonder, then, if he paid little heed to his host, and his host's
observations on an idle point of philology. Of late he had become horribly
bored by these consultations, and had often wished Horace and his amateur
editor buried irrecoverably beneath the dust of Herculaneum; but never was
his inattention so ill-timed as on that occasion!
"What are you looking at?" inquired Vyner, in a tone which his
politeness could not completely subdue.
"Looking at? Nothing," said Cecil embarrassed. "I was reflecting——."
"Oh! on my discovery?"
"Yes. It occurs to me that I have met with it before somewhere."
Cecil said this by way of cutting short the discussion, perfectly aware
that Vyner was too much of a commentator to care one straw about an
opinion, unless he were the originator.
"Impossible! Im-poss-ible!" ejaculated Vyner, much in the strain that

Dominie Sampson may have ejaculated 'prodigious!'
"It's very ingenious," said Cecil, who did not know a word about it,
"very; and true."
"Yes, yes, but you think it is not original? Its originality is everything
with me."
"Perhaps as some compromise between your theory and the ordinary

one, you might say that the orius amnis and the Adonic termination
generally is only a termination, not a new verse."
"Compromise!" exclaimed the astonished Vyner, "why that is my

theory!"
Cecil was posed. Convicted of such palpable inattention as to have

suggested as an improvement the very idea which had just been explained
to him, he could but stutter out some incoherent phrases of excuse.
Vyner was doubly hurt. The inattention was one offence, but that was
nothing to the careless way in which Cecil had proposed as an indifferent
modification the grand discovery he, Vyner, had made, which was to
immortalize him. With an air of quiet dignity, which Cecil had never seen
before, the offended philologist assuring him he was not ripe yet for such
subjects, which could scarcely be a matter of surprise at his age, he bowed
him out.
CHAPTER XI.
CECIL AGAIN WRITES TO FRANK.
Although you have not answered my letters, Frank, I must write to you
once more, if only to gratify that besoin d'epanchement which all lovers
feel. Were I a century or two older, I might carve my Blanche's name on
every tree, comme cela se pratiquait autrefois; but being a frock-coated-
nineteenth-century prosaic creature, I am condemned to write on
unsentimental Bath post, that which should be confided only to the trees.
You will doubtless raise those wondering eyebrows at the sight of the
name Blanche. It is not an erratum for Violet, I assure you; I have given up
all thoughts of that high-spirited, imperial, but imperious creature. I looked
into my heart and found I loved her not. She is evidently hurt at my
inconstancy; but, on nearer acquaintance, I found Blanche so infinitely
preferable, that I could not help making the comparison. Fortunately I had
not gone too far to recede, and the haughty girl will, I dare say, soon be
consoled.
I have not given you a description of Blanche. Shakspeare has

anticipated it in these lines—
If lusty Love should go in quest of beauty,

Where should he find it but in Lady Blanche?
She is very fair, with a skin of dazzling loveliness, long dreamy eyes,
always moist with emotion, an exquisite smile, a low soft voice—"an
excellent thing in woman"—and a wondrous head of hair, which has that
bright golden hue which Italians prize so highly—indeed, Firenzuola says,
"che de' capelli il proprio e vero colore è esser biondi."
We have all but declared our passion. It has been declared by our eyes,
but as yet I have had no favourable opportunity of doing it in form. That she
loves me, I am certain; still more certain that I love her. She is the only
woman I ever met who would make me happy, and I feel that she will
change me into a quiet, domestic being. High time too, seeing that I have
squandered my patrimony. However, what with my four thousand pounds,
and the handsome dowry Vyner will assuredly give his daughter, we shall
be able to live modestly till I can get diplomatic employment. Once his son-
in-law, Vyner will be forced to exert his interest in my behalf.
By the way, it is fortunate I have already captured Blanche's affections,

for I have certainly lost all Vyner's favour, at least for the present. He was
giving me a tedious account of some twaddling notion he had excogitated
about Horace's versification, to which I paid all the less attention, as my
eyes were then following Blanche, who was engaged in a deep conversation
with Captain Heath. Unfortunately I betrayed my inattention, and he has not
forgotten it. He is now distant and almost cold in his manner, and never
mentions Horace. I must regain his confidence by some splendid
emendation. If not, I must trust to Blanche to purchase my forgiveness.
The house is lightened of Mrs. Broughton and her niece, and young
Lufton. I regret the last named; he has been useful to me, in losing seventy
pounds to me after winning two ponies at billiards.
Yours ever,
CECIL.
CHAPTER XII.
CECIL PUT TO THE TEST.
"You think me unjust to Mr. Chamberlayne," said Captain Heath one

morning to Blanche, as they sat together in the drawing-room discussing the
character of her lover, "because you are so young and know so little of the
world, that you trust appearances, and cannot pierce beneath them."
"But I cannot be mistaken in supposing him very good hearted, and

wonderfully clever."
"He is good tempered, not good hearted; cleverish, but not clever. It is
natural that you should mistake the characteristics of good temper for those
of a good heart—most people do so."
"And is not a good temper a sign of a good heart?"

"No, my dear Blanche, not in the least; it is very often only the sign of a
weak and indolent organization—sometimes of mere cold selfishness. You
look indignant. I do not say it is a sign in him of selfishness, I only say it is
no sign of goodness."
"But what makes you so illiberal towards him?"
"Illiberal! I am merely and strictly just. I do not like him, because he is

weak and insincere."
"Insincere!"
"Yes; he toadies your father by pretending to care about Horace and

your father's commentary, which he laughs at behind his back."
"It is your dislike," said Blanche, rising and colouring, "which distorts
your usual candid judgment. You do not like him, and you misinterpret
everything. I won't have him abused. I like him very much—very much,
and I can't sit and hear you talk so of him." She left the room.
Captain Heath did not stir. He had never seen such an exhibition of
temper on the part of Blanche before. She was greatly moved, it was
evident. And there could be but one cause for her agitation—that cause
made the captain thoughtful.
The truth is, he loved Blanche, and now seemed for the first time to see
that she loved Cecil. He had vaguely suspected it before. This was a
confirmation. His lip quivered as he said, "She is perhaps right. My dislike
may be groundless. I will try him."
Cecil shortly afterwards sauntered in.
"Are you for a game at billiards," said the captain.
Cecil stared at such an invitation from one whom he had never seen in
the billiard-room since his arrival, but accepted, with some curiosity as to
how the "solemn prig" would play.
The dislike was mutual; and mutually did they libel each other.
"By George! you play a first-rate game," said Cecil, amazed at the skill
of his antagonist, whom he expected to find an indifferent hand.
"Yes, I play well," quietly answered the captain. "I used to play a great
deal when with my regiment. But you are stronger at it than I am."
Cecil thought so, but would not acknowledge it. Nevertheless, the
captain won three games in succession, which considerably irritated his
antagonist, who began to swear at the chalk, to abuse the table, to change
his cues frequently, and to throw the blame of his non-success upon
anything and everything except his want of skill.
The captain, who was critically observing him throughout the game to
see if his opinion was well or ill founded, smiled scornfully at all these
ebullitions. He had judged rightly in assuming that the best moment for
observing a man's real character is during a game of chance and skill
combined. Then it is that a man unbends, and shows himself as he really is.
The self-love is implicated; and, as both vanity and money are at stake, you
see a mind acting under the impulsion of two of its most powerful
stimulants. Cecil, who was both vain and weak, was betrayed into a
hundred little expressions of his character; and, as he was also somewhat
less than delicate—without being at all dishonourable—in money matters,
he led the captain to think ill of him on that score.
Having made up his mind as to Cecil's real worth, he determined to put

him to the trial on a matter in which he was himself directly interested.
"Have you ever played with Violet?" he asked. "She is a wonderful

hand. But then she does everything well. (I doubt whether I can make this
cannon—yes, there it is.) What a splendid creature she is! Isn't she?"
"Splendid, indeed! They are all three lovely girls, though in such
different styles."
"(How stands the game? Seven, love: good.) What a sad thing it is,
though, to think such girls should be absolutely without fortune. (Good
stroke!)"
Cecil was chalking his cue when this bomb fell at his feet; he suspended
that operation, and said,—
"What do you mean by their having no fortune?"
"Why, the estate is entailed, and Vyner, who is already greatly in debt,
will neither have saved any money to leave them when he dies, nor be able
to give them anything but their trousseaux when they marry."
"The devil!"
"(That's a teasing stroke: one of the worst losing hazards. You must take
care.)"
This last remark, though applied to the game, was too applicable to
Cecil's own condition for him not to wince. The captain's eye was upon
him.
"What a d—d shame!" exclaimed Cecil, "for a man with an entailed

estate to make no provision for his children. It's positively monstrous!"
"Horrible, indeed!"
"Why, what is to become of them at his death?"
"They will be penniless," gravely replied the captain, as he sent the red
ball whizzing into the pocket.
"I wonder he is not ashamed to look them in the face," said Cecil, duly
impressed with the enormity.
"He trusts, I suppose, to their marrying rich men," carelessly added the
captain. "(Game! I win everything!)"
Cecil declined to play any longer. He went up into his own room, and
locked himself in, there to review his situation, the aspect of which the
recent intelligence had wonderfully altered.
Captain Heath shrugged his shoulders, quietly lighted a cigar, and
strolled out, well satisfied with the result of his experiment.
Then he met Blanche, who came up to him, holding out her hand, and
asking forgiveness.
"I was very naughty," she said, "but you have spoiled me so, that you
must not be astonished if I do not behave myself to you as to my best
friend. But the truth is, I was angry with you, and now I am angry with
myself, Am I forgiven?'
He only pressed her hand, and looked the answer. She put her arm
within his, and walked with him to the river, where they got into the boat,
and he rowed her gently down. She prattled to him in her prettiest style all
the way, for she was quite happy at having "made it up with her darling
Captain Heath."
It should be observed that, although he was no more than five and thirty,
yet, to the girls, he was always an elderly man, they having known him
from childhood. They were extremely fond of him, as he was of them; but
they laughed outright at one of their companions, asking Rose if there was
anything like flirtation between them.
"Flirtation!" exclaimed Rose. "Why, he is bald!"
The hair, indeed, was somewhat worn away above the forehead; but this
was from the friction of his hussar cap, not from age.
"No, no, my dear," continued Rose, "I make no havoc with the highly-
respectable-but-eminently-unfitted-for-flirtation race of papas and
grandpapas. My Cupid is in no need of a toupet; and if I am to be shot, it
shall not be with a gouty arrow. Captain Heath is handsome—or has been—
and though his moustachios are as dark and silky as a guardsman's need be,
yet he has one leetle defect—his age makes him respectable!"
In consequence of this notion, they neither thought of falling in love

with him themselves, nor of the probability of his falling in love with them.
They were, therefore, as unrestrained with him as with a brother or an
uncle. Blanche was his especial favourite and constant companion. He
knew well that she regarded him as too old to be loved, but trusted that her
eyes would be opened to the fact, that there was really no great disparity
between them.
"I have been playing billiards with Mr. Chamberlayne this morning,"
said the captain, as he rested on his oars, and allowed the stream to float
them quietly down.
"You have? Then I hope your opinion is changed."
"So far from it, I prophesy that his attentions to you—which have been
marked of late—will visibly decrease, until they relapse into mere
insignificance. And all because I casually remarked that your father's estate,
being entailed, and he being in debt, you and your sisters were portionless."
"And you suppose him capable of—oh! this is too bad. It is

ungenerous."
"My dear Blanche, I may be wrong, but I fear I am not; let me not,
however, be condemned, till the event condemns me. Watch him!"
"You shall own you have calumniated him; the event shall prove it," she
said with great warmth.
A dark shade passed across his brow, and he rowed rapidly on. Not
another word passed between them.
CHAPTER XIII.
HOW A LOVER VACILLATES.

Cecil's reflections had not been cheering. Although he felt himself too
much in love with Blanche to give her up because she was portionless, he
was, at the same time, too well aware of his own slender resources to think
of marrying upon them. Bred to luxurious habits, he was not one by whom
poverty could be lightly treated.
The more he reflected, the more urgent it appeared to him that he should
conquer his passion, and save himself from perdition. Could Captain Heath
have read what was passing in his rival's mind, he would have smiled
grimly at this verification of his suspicions, and rejoiced in the success of
an experiment which removed that rival from his path.
As Cecil descended into the drawing-room that day before dinner, he

was struck painfully by the sight of Violet on the sofa in exactly the same
attitude—caressing Shot—as she had appeared to him on that afternoon
when he had relinquished all idea of her. The coincidence affected him.
"There is a fate against my marrying into this family," he said to

himself: "first one, and then the other."
Blanche was standing at the window, looking out. She turned her head
towards him as he entered, and felt a little mortified to see him throw
himself into a chair by the side of Rose, with whom he began a lively chat.
Captain Heath, who had watched this manœuvre, now looked at

Blanche; but she, conscious of his gaze, avoided it, and again resumed her
contemplation of the undulating lawn and woody distance.
Dinner was announced. Meredith Vyner, as usual, took Mrs. Langley

Turner; Sir Harry Johnstone, Mrs. Vyner; and Tom Wincot, Violet. Cecil, to
Rose's surprise, offered her his arm, which was natural enough, inasmuch as
he had been talking to her up to that time; but still, as for many days he had
invariably managed to take Blanche, she could not help remarking the
circumstance.
Captain Heath walked up to Blanche, who remained at the window; her

heart throbbing violently, her mind distracted with contradictory thoughts.
"Blanche," he said, tenderly, "we are the last."
"I shall not dine to-day," she said, angrily, hurt at the pity of his tone.
"My dear Blanche, do not betray yourself; do not give him reason to
suppose his neglect can affect you."
She sighed, put her arm within his, and walked silently with him into
the dining-room.
She sat opposite Cecil, who seemed more talkative than usual. No one
remarked her silence—she seldom spoke at dinner, except to her neighbour.
No one asked her if she were ill, though she sent away her plate each time
untouched. Cecil and Captain Heath observed it; both with pain.
Keen were the pangs she suffered at this fulfilment of the captain's cruel
prophecy, and bitterly did she at that moment hate him for having
undeceived her. That Cecil avoided her was but too evident. That his
neglect could have but the one motive Captain Heath had ascribed was
never doubted; but she threw all the blame on the captain's officiousness in
speaking about their want of fortune, and in fact, with all the
unreasonableness of suffering, hated him as the proximate cause of her
pain.
Captain Heath applauded his own sagacity as a reader of character, and

rejoiced as a lover in the success of his calculation. But he rejoiced too
soon. Like most men he had erred in his calculation, because he dealt with
human nature as if it were simple, instead of being, as it really is, strangely
complex; and as if one motive was not counteracted by another. This is the
grand source of the errors committed by cunning people: they are said to be
"too cunning" when they overreach themselves by what seems an artful and
logically-reasoned calculation; but the truth is, they have not been cunning
enough. They have planned their plans as if the mind of man were to be
treated like a mathematical problem, not as a bundle of motives, of
prejudices, and of passions. The plan may look admirable on paper; but then
it is constructed on the assumption that the victim must needs be impelled
by certain motives; whereas, when it comes into execution, we find that
some other motives are brought into play, the existence of which was not
allowed for in the calculation; and these entirely subvert the plan.
Captain Heath's plan erred in precisely this way. Judging Cecil's

character in the main aright, he justly argued that such a man would shun
poverty as a pestilence, because he was weak, and money is power; and that
he would shrink from affronting the world with no other aid than his own
right hand. He therefore concluded that an intimation of Vyner's affairs
would be an effectual method of putting an end to Cecil's attentions.
Now this argument would have no flaw in it, if we assume that a man is
led solely by prudential considerations: it would be perfect, were men
swayed solely by their reason.
Cecil's views were precisely such as Captain Heath had suspected. But
then Cecil had emotions, passions, senses—and these the captain had left
out of the calculation. Yet these, which are the stronger powers in every
breast, were to overthrow the captain's plan.
Cecil in his own room, surveying his situation, was a very different man
from Cecil in the presence of his beloved, pained at the aspect of her pain,
and conscience-stricken as he gazed upon her lovely, sorrowing face. His
heart smote him for his selfishness, and he was asking himself whether he
could give her up—whether poverty with her were not preferable to
splendour with another, when he thought he saw something in the captain's
look which betokened scornful triumph.
"Can he have deceived me? Does he wish to get me out of the way?" he
said to himself. "Egad! I think so. The game at billiards this morning—that
was mysterious. What could induce him to propose such a thing to me—he
who never took the slightest notice of me before? He had some motive. And
then his story about Vyner's affairs—fudge! I won't believe it, until I have it
on better authority."
The ladies rose from the table.
"I sha'n't sit long over the wine," Cecil whispered to Blanche, as she
passed him.
A sudden gleam irradiated her sweet face, as she raised it towards him
with a smile of exquisite joy and gratitude. That one word had rolled the
heavy stone which was lying on her heart, and gave the lie to all the "base
insinuations of that odious Captain Heath."
'Twas thus she spoke of one she really loved, and who loved her more
than anything on earth!
The men drew their chairs closer together, and commenced that
onslaught on the dessert which is characteristic of such moments.
"Have you never remarked," said Cecil, "that men refuse to touch fruit
until the women retire, and then attack it as if their appetites had been
sharpened by restraint?"
"It is, I pwesume, upon the pwinciple of compensation," said Tom

Wincot. "Depwived of the fwuit of humanity, the gwapes, apwicots, and
nectawines of life, we are thwown upon the fwuit of nature! I say, Cecil,
isn't that vewy poetically expwessed?"
"Very. But I don't think much of the compensation myself. I should like
the women to remain with us as they do abroad."
"That," said Meredith Vyner, "would spoil dinners. The pleasantest part
is the conversation after the ladies have retired."
"Besides," objected Tom Wincot, "however pleasant the society of

women, one can't be always with them. Toujours perdwix!"
"Toujours de la perdrix," interposed Vyner, glad of an opportunity of

setting any one right. "If you must quote French, quote it at least correctly."
"Isn't toujours perdwix cowect, Mr. Mewedith Vyner. I never heard it

expwessed otherwise."
"No, sir, it is grossly incorrect. The phrase is attributed to Louis XV.

who excused his conjugal inconstancy by saying, that although partridges
might be a dainty dish, 'Mangez toujours de la perdrix, et vous en serez bien
vite rassasié,' was his witty but immoral remark. The claret is with you, Mr.
Wincot."
"By the way," said Cecil, who was anxious to regain Vyner's goodwill,
by flattering his vanity, "I have a theory which I must call upon your stores
of learning, Mr. Vyner, to assist me in developing." Vyner bowed, and with
his forefinger and thumb prepared a pinch of snuff, while Cecil continued
—"It was suggested to me by Talleyrand's witticism that language was
given to man to conceal his thoughts."
"Talleyrand," said Vyner gravely, "is not the author of that joke; though
it is commonly attributed to him. The author is a man now* living in Paris,
M. Harel, some of whose bon mots are the best I ever heard. I remember his
describing to me M. Buloz, the proprietor of The Revue des Deux Mondes
and The Revue de Paris, as a man who was 'l'âme de deux revues, avec
l'attention habile de n'en être jamais l'esprit.'"
* 1840. He died in 1846.
"L'attention habile," exclaimed Cecil, laughing loudly, "is exquisite. To

my theory, however."
"No, no; none of your theowies," said Wincot, "they are always
pwepostewously exaggewated."
"You shall judge," replied Cecil, "in saying language was given to us to
conceal our thoughts, M. Harel explained the construction of a great many
words in all tongues. Thus demonstration is evidently derived from demon,
the father of lies."
"That is vewy faw fetched. Pass the clawet."
"Then, again, Mr. Vyner will tell you," pursued Cecil, "that the Greek
verb to govern is ανασσω, which is derived from ανασσα, a queen, not from
αναξ, a king. Now, you will admit, that to deduce the governing principle
from the weaker sex is only a bit of irony. The mildest possible symbol is
used for the severest possible office, viz., government. The soft delicious
sway of woman who leads humanity by the nose is not to be disputed.
Bearded warriors, steel-clad priests, ambitious nobles, a ragged, mighty,
and mysterious plebs, these no single arm could possibly subdue. And yet a
king is necessary. Here the grand problem presents itself: how to force the
governed to accept a governor?"
"Oh! pass the clawet!"
"The king," said Vyner, shutting his box, "is the strongest. König,
Könning, or canning: he is the one who can rule."
"But," replied Cecil, "I maintain he can't rule: no man was ever strong
enough to rule men. The true solution of the problem is, that the first king
was a woman."
"This is fuwiously widiculous!"
"Laugh! laugh! I am prepared to maintain that woman is weak, and

omnipotent because of her weakness. She is girt with the proof armour of
defencelessness. A man you knock down, but who dares raise a hand
against a woman?"
"Very true," suggested Vyner, "very true. What says Anacreon, whom
Plato calls 'the wise?' Nature, he says, gave horns to bulls, and a 'chasm of
teeth to lions;' but when she came to furnish woman with weapons,
τι ουν δίδωσι; κάλλοϛ
Beauty, beauty was the tremendous arm which was to surpass all
others."
"And formidably she uses it," continued Cecil. "To man's violence she
opposes her 'defencelessness'—and nails; to his strength she opposes her
'weakness'—and tongue."
"In support of your theory," said Vyner, "the French call a queen a reine;
and we say the king reigns."
He chuckled prodigiously at this pun, which Cecil pronounced

admirable.
"My theory of kingship is this," said Cecil. "The first king, as I said,
was a woman. She ruled unruly men. She took to herself some male subject,
helplessly strong; some 'brute of a man,' docile as a lamb; him she made her
husband. Her people she ruled with smiles and promises, touchingly
alluding, on all befitting occasions, to her helpless state. Her husband she
ruled with scratches——"
"And hysterics," feelingly suggested Vyner.
"Well, a son was born—many sons if you like; but one was her especial
darling. Growing old and infirm, she declared her son should wield the
sceptre of the state in her name. Councillors demurred; she cajoled; they
consented. Her son became regent. At her death he continued to govern—
not in his name, but in hers. The king was symbol of the woman, and
reigned vicariously. When we say the king reigns, we mean the king queens
it."
"Bravo!" exclaimed Vyner, chuckling in anticipation of the joke; "and

this is the explanation of Thiers's celebrated aphorism, 'le roi REGNE et ne
gouverne pas.'"
"This explains also the Salic law; a curious example of the tendency of
language to conceal the thoughts. A decree is enacted that no woman shall
reign. That is to say, men preferred the symbol (man) to the reality
(woman). They dreaded the divine right of mistresses—the autocratic
absolutism of petticoats."
"And pray, Mr. Chamberlayne," asked Vyner, "how do you explain the
derivation of the French verb tuer, to kill, from the Latin tucor, to
preserve?"
"Nothing easier upon my theory of the irony of language. What is death
but preservation?"
"Bwavo! pwoceed. Pwove that."
"Is it not preservation from sickness and from sorrow, from debts,
diseases, dull parties, and bores? Death preserves us, by rescuing our
frames from mortality, and wafting our souls into the bosom of immortal
life. Then look at the irony of our use of the word preserves, i.e., places
where game is kept for indiscriminate slaughter; or else, pots of luxurious
sweets, destined to bring children to an untimely end."
"Why," said Vyner, "do we call a sycophant a toady?"
"I really don't know."
"Because his sycophancy has its source in το δέος, fear," replied Vyner,
delighted at the joke.
"Good!" said Cecil, laughing. "I accept the derivation: the irony is
perfect, as a toad is the very last creature to accuse of sycophancy; he spits
upon the world in an unbiassed and exasperating impartiality: hence the
name. One of the things which has most struck me," he continued, "is the
occasional urbanity of language—instance the word question for torture."
"Like Astyages in Herodotus," said Vyner, "politely counselling the

herdsman not to desire to proceed to necessities, εϛ ταϛ ανάγκαϛ, which the
man perfectly understands to mean torture. Consider, also, the changes
which take place in words. 'Virtue' originally meant manliness. The Greek
word αρετη is obviously derived from Ares (Mars), and meant martialness;
it has now degenerated into virtù, a taste for cameos and pictures; and into
virtue, woman's fairest quality, but the farthest removed from martial
excellence."
"This is all vewy ingenious, pewhaps," said Tom Wincot; "but let us go
to the ladies, and hear their theowies."
They rose from table. Vyner in evidently better disposition towards
Cecil than he had been since the last Horatian discussion; Maxwell dull and
stupid as ever; Captain Heath silent and reflective.
CHAPTER XIV.
JEALOUSY.
O, my lord, beware of jealousy.
It is a green-eyed monster that doth mock
The food it eats on.
Othello.
A bright smile from Blanche welcomed Cecil, as he passed from the

dining-room to the drawing-room, and walked up to the piano at which she
was sitting. He thought he had never seen her look so lovely; perhaps the
remembrance of his having contemplated giving her up made him more
sensible of her charms.
He took up her portfolio of loose music, and began turning over the
sheets, as if seeking some particular song. She came to help him, and as she
bent over the portfolio he whispered gently,—
"Can you contrive to slip away unobserved, and meet me in the

shrubbery? I have something of the deepest importance to communicate."
She trembled, but it was with delight, as she whispered, "Yes."
"Plead fatigue, and retire after tea."

He then moved away, and approaching Violet asked her if she
remembered the name of a certain Neapolitan canzonette, which her sister
Blanche had sung the other night; and on receiving a negative sat down by
her side, and entered into conversation with her.
All the rest of the evening he sat by Violet, only occasionally addressing
indifferent questions to Blanche. Captain Heath seeing this, and noticing a
strange agitation in Blanche's manner, which she in vain endeavoured to
disguise, interpreted it according to his wishes, and sat down to a rubber at
whist with great internal satisfaction.
"I have been thinking, Mr. Chamberlayne," said Meredith Vyner,

shuffling the cards, "that even differences of pronunciation may assist your
theory. Thus we English—a modest race—express our doubt by scepticism,
deriving it from σκέψιϛ, deliberation. But the Scotch—a hard dogmatic race
—pronounce it skeepticism, hereby deriving it from σκηψιϛ, intimating that
a man leans upon his own opinion, and that his dissent from others is not a
deliberation, but a walking-stick, wherewith he trudges onwards to the
truth."
"Mr. Chamberlayne," said Mrs. Meredith Vyner, "are we not to have

some music from you this evening? Come, one of your charming Spanish
songs."
"By the way," said Vyner, while Cecil tuned his guitar, "talking of
Spanish songs reminds me of a passage I met in a Spanish play this
morning, in which the author says,
Sin zelos amor

Es estar sin alma el cuerpo.
What say you to that, ladies? It means that love without jealousy is a body
without soul. Immane quantum discrepat!"
"Love has nothing whatever to do with jealousy," said Violet; "and so

far from jealousy being the soul of love, I should say it was only the
contemptible part of our nature that feels jealousy, and only the highest part
of our nature that feels love."
"No one will agree with you, my dear Violet," said Mrs. Langley Turner.
"Sir Harry, it is your deal."
"Perhaps not," said Violet.
"I should vewy much like to hear Miss Violet's pwoof of her wemark. I
have always wead that jealousy is insepewable fwom love; though, I
confess, I never expewienced jealousy myself."
"Nor love either—eh?" said Rose.
"That is sevewe, Miss Wose! Do you pwetend that I never felt that
sensation which evewy man has felt?"
"If you mean love," replied Rose, "I say, that if you have felt it, I
imagine it has only been just the beginning."
"Twue, twue!"
"And like the charity of other people, your love has begun at home!"
"Miss Wose, Miss Wose!" said Tom Wincot, shaking his finger at the
laughing girl.
"So that, if you have ever been jealous," she continued, "you must have
an exaggerated susceptibility."
"And why an exaggewated susceptibility?"
"Because jealous of a person no other earthly being would think of

disputing with you—your own!"
This sally produced a hearty laugh, and Tom Wincot, turning to Violet,
said,—
"I'm afwaid of your sister Wose's wepawtees, so shall not pwolong the
discussion; but pway explain your pwevious weflection on jealousy."
"I mean," said Violet, "that jealousy has its source in egotism; love, on
the contrary, has its source in sympathy: hence it is that the manifestations
of the one are always contemptible, of the other always noble and
beautiful."
"And I," said Maxwell, his dark face lighting up with a savage
expression, "think that jealousy is the most natural instinctive feeling we
possess. The man or woman who is not jealous, does not know what it is to
love."
"That is a mere assertion, Mr. Maxwell: can you prove it?'
"Prove it! easily. What is jealousy but a fear of losing what we hold
most dearly? Look at a dog over a bone; if you approach him he will growl,
though you may have no intention of taking away his bone: your presence is
enough to excite his fear and anger. If you attempt to snatch it, though in
play, then he will bite."
"You are speaking of dogs," said Violet, haughtily, "I spoke of men."
"The feeling is the same in both," retorted Maxwell.
"Yes, when men resemble dogs.—I spoke of men who possessed the
higher qualities."
"Curiously enough," observed Vyner, "the Spaniards, whose jealousy is

proverbial, and whose great poet, Calderon, has expressed himself in the
almost diabolical manner just mentioned, these Spaniards have no word
which properly means jealousy. Zelos is only the plural of zelo—zeal."
"I do not think, papa, you are quite correct," said Violet, "when you say
the Spaniards are more jealous than other nations."
"They have the character, my dear."
"I am quite aware of it. But what one nation says of another is seldom
accurate. If I understand jealousy, it is the sort of passion which would be
felt quite as readily by northerns as by southerns, though it would not be
expressed in so vehement a manner; but because one man uses a knife,
when another man uses a court of law, that does not make a difference in
the sentiments."
"I agree with Violet," said Captain Heath, "it seems to me that jealousy
is a mean and debasing passion, whatever may be the cause which excites
it. To suspect the woman whom you love and who loves you, is so
degrading both to her and to you, that a man who suspects, without
overwhelming evidence, must be strangely deficient in nobility of soul; and
suppose the evidence complete—suppose that she loves another, even then
a noble soul arms itself with fortitude, and instead of wailing like a
querulous child, accepts with courage the fate which no peevishness can
avert. The love that is gone cannot be recalled by jealousy. A man should
say with Othello,—
I'll see before I doubt; when I doubt, prove;

And on the doubt there is no more but this—
Away at once with love and jealousy."
He looked for Blanche as he concluded this speech, but she had already
retired to her room.
Cecil sang, but soon left off; and pleading "heartburn," caught at the
advice of Tom Wincot, who assured him that a stwong cigar was the best
wemedy for it, and strolled out into the grounds to smoke.
CHAPTER XV.
THE LOVERS MEET.

And in my heart, fair angel, chaste and wise,
I love you: start not, speak not, answer not.
I love you......
HEYWOOD.—A Woman killed with Kindness.
It was a lovely night. The full harvest moon shed a soft brilliance over
the far-stretching meadow-lands; the sky was dotted with small patches of
light fleecy cloud, and a few dim stars. All was hushed in that repose which
lends a solemn grandeur to a night-scene, when the sky, the stars, the
silence—things suggestive of infinity—become the objects of
contemplation.
Cecil was not one to remain indifferent to such a scene: his painter's eye
and poet's heart were equally open to its mild splendour. The tall trees
standing dark against the sky, and the dim outline of the woody heights
around, no more escaped his notice, than the picturesquely grouped cattle,
one of which, a dun cow, with large white face and chest, stood motionless
amidst her recumbent companions.
Although he could not resist the first burst of admiration, Cecil was in
no mood to luxuriate in the poetry of such a scene, as he would have done
at any other time; but, striking into the thick and shadowy shrubbery,
delicately chequered with interspaces of moonlight, he began to consider
the object of this nocturnal ramble.
It would be difficult to explain the motive which impelled him to make

this assignation. It was one of the sudden inspirations of passion, which
defeat whole months of calculated prudence. Nothing could have been more
opposed to his calculations than anything like an express declaration, until
he had ascertained the truth of what Captain Heath had asserted. And
although he rose from the table with the resolution to be on his guard, and
to watch closely the state of affairs, his first act, as we have seen, was one
of consummate imprudence—one which inextricably entangled him in the
very net from which he was anxious to keep away. Now, upon Captain
Heath's view of his character, this was little less than madness—in short, it
was unintelligible. But it is intelligible enough upon a more comprehensive
view of human character; as every one will acknowledge who has ever
stood beside the girl he loves, in a room full of people—the very restraint of
the place sharpens desire, and makes the timid bold. Hence one reason why
so many more declarations are made in ball-rooms, and at parties, than in
tête-à-têtes.
Certain it is that Cecil, standing beside Blanche looking over the same
portfolio, their hands occasionally touching, their eyes occasionally
meeting, was in no condition to listen to the dictates of reason. A tumult of
desire beat at his heart. He was standing within that atmosphere (if I may
use the word) which surrounds the beloved, and which, as by a magnetic
power, inconceivably stirs the voluptuousness latent in every soul. He was
within the halo which encircled her, and was dazzled by its lustre.
Irresistibly urged by his passion to call this lovely creature his own, he
could not forego bringing things to a crisis; and he made the assignation.
Her consent enchanted him. He was in a fever of impatience for her to
retire. He cursed the lagging time for its slowness; and, with a thrill of
delight, found himself in the open air, about to hear from Blanche's own lips
that which her eyes had so frequently expressed.
In a few minutes, all this impatience and delight subsided. He had

gained his point. Blanche had consented to meet him; and he had contrived
to come to the rendezvous without awakening any suspicion. Now, for the
first time, he began to consider seriously the object of that meeting. He was
calm now; and grew calmer the more he pondered.
"What an ass I have been!" he thought. "What the devil could induce me
to forget myself so far? She will come, expecting to hear me declare myself.
But I can't marry her. I can't offer her beggary as a return for her love. If
Heath should have told the truth. D—n it, he can't be such an unfeeling
egotist as not to make some provision for his children! No, no; I'll not
believe that. A few thousands he must in common decency have set aside,
or he would never be able to look honest men in the face. Besides, Vyner
doesn't appear to be particularly selfish. However, it may be true; and if so
——
"Can I invent something of importance to communicate instead of my

love? Let me see. That will look so odd—to make an assignation for any

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4 Traditional regulations and market incentives 48

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Appendix A: measurement of daily ozone, precursor

Appendix B: explanation of generalized least squares and

5.1 Price determination and cost savings with a homogenous

2.1 Ozone morbidity damage reductions obtained by reducing

Special mention must be made of those who helped by contributing important

ACMA Alternative Compliance Market Account

The political economy of the Chicago market design

Expectations and actual market performance

1 emissions far below the cap;

Simulated performance of alternative market models

Explaining market performance

Hot spots, spikes, and emissions trading

Banking horizons of tradable permits: an

Conclusions and policy recommendations for

In a review of the findings reported earlier, the authors first considered

Health and welfare motivations for market

Reduction in Value per case Total damage

Mid-range estimate, total 26.80 NA 348.33

Source: Adapted from Tolley (1993: 14).

The regulatory options

Classification Selected regulatory requirements for Attainment

Marginal Emissions inventory due in 2 years, Reasonably Nov. 15, 1993

Source: Adapted from Calcagni (1993: 190).

Area class Eight-hour design value Maximum period for Emissions

Marginal From 85 up to 92 Up to June 03, 2007 Required

Source: Adapted from US EPA 2005 http://www.epa.gov/ozonedesignations/ozonesample

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The market design dialogue and decisions

1 The benchmark of emissions, both aggregate and for individual emitters, is an

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"You are singular, then," was his quiet reply.

"Why singular, in preferring brains to beauty? Are we women really, do

"Well, I'm sure, handsome men generally are—not, perhaps, fools—but

"Very well, very well. I certainly have no cause to wish it."

"Except the love of victory in argument, eh?"