International Emissions Trading Association (IETA)

Which sectors should be covered by emissions trading regulations?

For the first time, the US Congress is debating climate change policy in a serious way. A number of bills have been introduced that would establish greenhouse gas (GHG) emissions trading programs as part of efforts to address climate change. In discussions on climate policy proposals, the stringency and timing of emissions reduction targets are often seen as determining program costs. Allocation mechanisms and auction schedules also are receiving significant attention. However, allocation approaches will not affect the magnitude of a GHG trading program’s costs; they will only affect the distribution of costs. In contrast, other design elements will strongly influence costs.

Such elements include sectoral and GHG coverage, the use of markets for compliance, banking and borrowing of allowances, and various mechanisms designed to provide certainty with respect to compliance costs (including but not limited to a price cap). This paper considers the possible impact on economic and environmental effectiveness of key provisions in twelve legislative proposals to create a US emissions trading program. These provisions address coverage, compliance flexibility, and.cost-control mechanisms. In providing this assessment, the paper takes into account both economic modeling and experience in emissions trading markets.

One of the most important decisions in designing an emissions trading program is determining which sectors and entities will be regulated, or covered. Traditionally, emission trading programs have only covered large stationary sources downstream (i.e. at the point of emission). For the most part these sources are in the power generation, energy production, and energy intensive manufacturing sectors.

Typically, they account for approximately 40 to 50 percent of state, national, or regional GHG emissions (e.g. the EU Emissions Trading Scheme (EU ETS), covers CO2 emissions from large downstream sources, which represent just under 50 percent of the EU’s CO2 emissions and approximately 40 percent of its GHG emissions.) Based on experience with the U.S. sulfur dioxide (SO2) and nitrogen oxides (NOx) trading programs – which were designed to mitigate acid rain, ground-level ozone and smog – downstream coverage is administrable and enforceable and can provide substantial environmental and economic benefits.

However, downstream coverage leaves key GHG emissions sources, such as personal transport, unaddressed. Failure to cover emissions from transport would be a cause for concern, as it would greatly diminish economic and environmental effectiveness. To date, no GHG trading program has covered personal transport emissions, although legislation recently introduced in Congress includes provisions for covering emissions embedded in transport fuels upstream (i.e. at the fuel supplier level).

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