Toxic inhalation hazard (TIH) chemicals such as chlorine gas and anhydrous ammonia are among the most dangerous of hazardous materials. Rail transportation of TIH creates risk that is not adequately reflected in the costs, creating a TIH safety and security externality. This paper describes and evaluates policy alternatives that might effectively mitigate the dangers of TIH transportation by rail. After describing the nature of TIH risk and defining the TIH externality, general policy approaches to externalities from other arenas are examined. Potential risk reduction strategies and approaches for each segment of the supply chain are reviewed. The paper concludes by summarizing policy options and assessing some of the most promising means to reduce the risks of transportation of toxic inhalation hazards. Four policy approaches are recommended: internalizing external costs through creation of a fund for liability and claims, improving supply chain operations, enhancing emergency response and focusing regulatory authority. It is further suggested that the Department of Transportation convene a discussion among stakeholder representatives to evaluate policy alternatives.