Environmental Markets Association

Emissions Trading, the economy and the environment

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Courtesy of Environmental Markets Association

John Kinsman reviews the successes of emissions trading and rebuts fears that trading might lead to localised ‘hot spots’

The US Acid Rain Program, established in 1990 to reduce sulphur dioxide (SO2) and nitrogen oxides (NOx) from electric power plants across the nation, introduced the first major attempt to use emissions trading. This has been so successful in cost-effectively reducing SO2 emissions that many new air quality regulations are expected to incorporate a ‘cap-and-trade’ approach. The Environmental Protection Agency (EPA) predicts that a new cap-and trade programme for SO2, NOx and mercury (President Bush’s Clear Skies proposal) would save over $1 billion annually compared to if no trading was allowed.

Statistics from the EPA show that the SO2 trading scheme has achieved virtually 100% compliance and reduced emissions by approximately 40% from 1980 levels through 2001. This should increase to about 50% by the end of the decade. Furthermore, compared to ‘command-and-control’ measures, hundreds of millions of dollars were saved each year as a result of Phase 1 (1995–99) and savings will grow in Phase 2 (2000 and beyond).

Factors contributing to this success include:

·        An attainable emissions cap was set with reasonable deadlines.

·        Reductions were required in two phases.  Staged reductions allow learning and innovation based on previous compliance activities.

·        The government did not specify how emissions sources should achieve compliance; rather, source owners have the flexibility to choose those activities – such as fitting emissions control technology, fuel switching and/or buying allowances – that make sense given their specific circumstances.

·        The federal government set very specific rules about how companies must prove how much SO2 they actually emitted.

·        There is a substantial penalty for companies that do not turn in enough allowances to prove annual compliance.

As allowances have value in a trading system, each emission source has an incentive to find the least-cost combination of controlling emissions and buying or selling allowances to reduce costs for customers and shareholders alike. Compliance strategies fully integrate environmental protection into financial performance and long-term financial planning.

Companies that surpass their reduction targets can retain allowances, which therefore become a tangible financial asset.  Retained allowances can be banked to accommodate new generation, sold in the market, saved for use during a second phase or as a contingency that targets might be lowered, used at another of the company’s facilities, or used to ease facilities into compliance more gradually. A gradual transition allows companies to take advantage of evolving understanding of compliance options as well as new developments in environmental and energy policies. Trading provides the flexibility to consider company-specific and local circumstances such as local jobs, local coal resources, etc.

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