Emissions trading

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(Redirected from Cap and trade)

Emissions trading is an administrative approach used to reduce the cost of pollution control by providing economic incentives for achieving reductions in the emissions of pollutants. In such a plan, a central authority, such as an air pollution control district or a government agency, whether on a federal or state level, sets limits or "caps" on each pollutant, recognizing that clean air is a common-pool resource. Groups that intend to exceed the limits may buy emissions credits from entities that are able to stay below their designated limits. This transfer is normally referred to as a trade.

In some emission trading systems a portion of the traded credits are required to be retired. By retiring some of the credits the system achieves a net reduction in emissions, as well as cost reduction, from each trade. Most authorities agree that emissions trading is an effective strategy if properly designed and administered.

Emissions trading or marketable rights have been in use in the United States since the mid-1970s. The advocates of free-market environmentalism sometimes use emissions trading or marketable rights systems as examples to support the theory that free markets can handle environmental problems. The total amount of available marketable or tradable rights is generally set by a political process, not by the market; but the systems allows the market to determine how to deal with the resulting allocation problem.

The idea is that a central authority will grant an allowance to entities based upon a measure of their need or their previous pollution history. For example an allowance for greenhouse gas emissions to a country might be based upon total population of the country or based on existing emissions of the country. An industrial facility might be granted a license for its current actual emissions. If a given country or facility does not need all of its allowance, it may offer it for sale to another organization that has insufficient allowances for its emission production.

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Prominent trading systems

Perhaps the most successful emission trading system to date is the SO2 trading system under the framework of the 'Acid Rain Program' of the 1990 Clean Air Act. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions are to be reduced by 50 % from 1980 to 2010. For more information, see main article: Acid Rain Program.

In 1997, the State of Illinois adopted a trading program for volatile organic compounds in the Chicago area, called the Emissions Reduction Market System[1]. Beginning in 2000, over 100 major sources of pollution in 8 Illinois counties began trading pollution credits.

In 2003, New York State proposed and attained commitments from 9 Northeast states to cap and trade carbon dioxide emissions.

The European Union Emission Trading Scheme is the largest multi-national, greenhouse gas emissions trading scheme in the world. It commenced operation in January 2005 and all 25-member states of the European Union participate in the scheme.

The Kyoto Protocol will bind ratifying nations to a similar system, with the UNFCCC setting caps for each nation. Under the proposed treaty, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations.

Critics argue that emissions trading does little to solve pollution problems overall, as groups that do not pollute sell their conservation to the highest bidder. Overall reductions would need to come from a reduction of permits available in the system. Likely this would occur over time through central regulation, though some environmental groups acted more immediately by buying credits and refusing to use or sell them. Nevertheless, the transfer of wealth from polluters to non-polluters provides incentives for polluting firms to change, especially if the market price for pollution credits is very high.

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Effects on society and private enterprise

In private enterprise, emissions trading is very attractive because it does not harm industrial concerns, or require government subsidies. When the price per ton of emissions becomes high enough, well-managed polluting enterprises can make a rational decision to invest in pollution control equipment, and sell part of their emissions licenses.

In some proposed systems, the government grants tax credits to enterprises. However, these are more expensive for governments, and far less popular for that reason. Emissions trading is attractive to public interest environmental organizations, because in an open market they can purchase and retire emissions licenses. This permanently reduces the total amount of pollution produced.

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Effects on the environment

While emissions trading does not in itself reduce pollution, it encourages manufacturers to decrease pollution so they can sell their credits to other larger polluters and profit. The intention is to create a monetary incentive for companies to reduce pollution. By making it more costly to pollute, it effectively causes companies to compete at being less pollutive while being cost effective.

An important secondary effect is to disperse pollution sources. This occurs because the operators of polluting enterprises will naturally sell as many licenses as they can afford. This can be good, because at any given location, concentrations of a pollutant will be significantly less. Dispersing air pollutants may have negative effects as well. For instance, some environmental hazards, such as smog are caused by small amounts of pollutants dispersed over a wide area by automobiles and would not occur with such intensity if the same amount of pollutant was released from a single, stationary source such as a smokestack. Emissions trading thus especially becomes a concern if drivers or manufacturers of polluting vehicles are permitted to purchase credits to meet regulatory polluting limits for vehicle emissions.

A final effect is that if the total permitted amounts are fixed or decreasing, public interest groups can decrease them further by purchasing licenses. The net effect is to drive total emissions toward zero by establishing a quantifiable financial penalty for careless pollution.

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Stable totals are critical to a stable market

A critical part of emissions trading is that the amount of emissions must be fixed, or controlled in some socially-agreed fashion. Many people favor starting at the current level of emissions. It clearly can form no threat for existing industrial concerns, and at the same time promises no increase in the rate of pollution.

The total of all allowances issued may be adjusted to an agreed reduction rate for the particular emission or pollutant. Thus, the central authority may control the emissions, and allow market forces to encourage countries to produce less of the emissions.

For example, less developed countries with relatively high populations and lower pollution per head than Western countries may sell their allowances to the industrialised West. However, as the supply is finite, the more that the West produces, the more that the additional allowances will cost them, until it becomes uneconomic to pollute, and more economic to convert to less environmentally harmful technologies.

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Enforcement is critical to a stable market

Another critical part of the bargain is enforcement. Without effective enforcement, the licenses have no value. Two basic schemes exist:

In one, the regulators measure facilities, and fine or sanctions those that lack the licenses for their emissions. This scheme is quite expensive to enforce, and the burden falls on the agency, which then may need to collect special taxes. Another risk is that facilities may find it far less expensive to corrupt the inspectors than purchase emissions licenses. The net effect of a poorly financed or corrupt regulatory agency is a discount on the emissions licenses, and greater pollution.

In another, some other agency, usually a commercial agency licensed by the government, verifies that polluting facilities have licenses equal or greater than their emissions. Inspection of the certificates is performed in some automated fashion by the regulators, perhaps over the Internet, or as part of tax collection. The regulators then audit licensed facilities chosen at random to verify that certifying agencies are acting correctly. This scheme is far less expensive, placing most regulation in the private sector. In addition, auditing can be performed on well-paid contracts by persons, such as university professors or anti-pollution activists, whose reputation is more valuable to them than any practical amount of graft.

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See also

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External links

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