And the analog to pollution is the net liquidity risk associated with the difference between these two quantities, something akin to the LCR shortfall. That is, when the bank offers a lot of liquidity on demand to its customers but fails to hold an adequate buffer of HQLA, this is when it imposes spillover costs on the rest of the financial system.
In the case of the power plant, I argued that a regulation that calls for a fixed quantity of mitigation – that is, for a fixed number of scrubbers – is more attractive when there is little uncertainty about the cost of these scrubbers.