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20 September 2007
Participation Grows in Cap-and-Trade Environmental Policy Tool

20 September 2007 Participation Grows in Cap-and-Trade Environmental Policy Tool

U.S. agency uses system for pollutants, private sector for greenhouse gases

By Cheryl Pellerin
USINFO Staff Writer

Washington -- As air pollution and climate change rivet the attention of everyone from global leaders and corporations to nongovernmental organizations and schoolchildren, an environmental policy tool called “cap and trade” is showing promise for lowering a range of emissions.

Several kinds of cap-and-trade mechanisms exist, but generally such a system works by setting an overall limit, or cap, on one or more pollutants for a certain period for all emissions sources -- like electric power plants -- under the program. A desired environmental effect usually determines the cap.

Participating sources that exceed the cap pay fines, and those who come in under the cap can trade, sell or save (bank) what some systems call allowances, others credits.

In the United States, there are mandatory government-run cap-and-trade programs for pollutants and voluntary private-sector programs for greenhouse gases. They work differently, but each reports success in reducing levels of their targeted substances.

CAP AND TRADE AT EPA

The U.S. Environmental Protection Agency (EPA) has nearly 20 years of experience designing, operating and assessing cap-and-trade programs. The longest-running effort is the national Acid Rain Program, in place since 1995, which limits human-generated emissions of sulfur dioxide (SO₂), the harmful ingredient in acid rain, produced by the use of electric power generators and other industrial processes.

Another EPA cap-and-trade program, in place since 1999, limits emissions of nitrogen oxides (NO_x), key precursors of ozone formation.

Cap-and-trade programs can be powerful tools for protecting public health and the environment, Brian McLean, director of the EPA Office of Atmospheric Programs in the Office of Air and Radiation, told the House Energy and Commerce Committee in March.

“When the acid rain legislation was under development,” he said in testimony, “the proposal for a cap-and-trade approach was new, untested and viewed with skepticism. Many questioned whether it would deliver the promised environmental protection, whether the trading system would operate as advertised and whether costs would be reasonable. Today, it is clear that the answer to all these questions is a resounding ‘yes.’”

The Acid Rain Program sets a cap on total SO₂ emissions from the electric power sector on the U.S. mainland. It does this by issuing allowances that are equal to the cap, Gabrielle Stevens, an environmental scientist in the Clean Air Markets Division, Office of Atmospheric Programs at EPA, told USINFO, “and distributes them to the regulated sources.”

The allowances, each equal to 1 ton of SO₂, are essentially authorizations to emit. EPA also auctions off 2.8 percent of the allowances each year in March to anyone who wants to buy them. Current prices are about $515 a ton.

“There is an active allowance-trading market among regulated sources,” Stevens said. “But anyone can buy them -- brokers, schoolchildren. The idea is, because there’s a cap, if a school buys one allowance, that’s 1 less ton that is going to be emitted” into the environment.

The critical compliance element is a requirement for each source to hold sufficient allowances in its account to offset its annual SO₂ emissions. Sources that do not have enough allowances automatically are penalized.

“In 2006,” Stevens said, “the penalty was $3,152 per ton. As well, they have to surrender one allowance from their future distribution. Compliance rates with the program have averaged over 99 percent, while SO₂ emissions from power plants have decreased by 40 percent since 1990.”

CHICAGO CLIMATE EXCHANGE

Economist Richard Sandor, a research professor at Northwestern University in Illinois, launched the Chicago Climate Exchange (CCX) in 2003 to apply financial innovation and incentives to advance social, environmental and economic goals.

Today, the more than 300-member CCX is the world’s first and North America’s only legally binding greenhouse gas emissions allowance trading system. It is also the only global system for emissions trading based on all six greenhouse gases, including carbon dioxide, methane and nitrous oxide.

Members include Ford Motor Company, DuPont, IBM and other multinational companies; the states of New Mexico and Illinois; and major universities, traders and environmental professionals.

Although it is not required by law, CCX members commit to reducing greenhouse gas emissions by 6 percent by 2010. Members that cannot reduce their emissions can buy credits from those who make extra emissions cuts or they can buy offsets from approved projects that store, destroy or displace greenhouse gases.

Companies volunteer to such commitments for many reasons, including a push for more environmental disclosure from investors and public interest groups, CCX founder and chief executive Sandor told USINFO.

“By not managing emissions tightly, which is by definition required for emissions trading,” Sandor said, “companies may be interpreted by shareholders and markets as not knowing how much energy they consume -- where, how, why -- or what emissions they cause. Such companies may be interpreted as not having a strategic approach to climate change from a business and policy standpoint.”

“It’s our view,” Reid Harvey, chief of the Program Integration Branch, Climate Change Division, in EPA’s Office of Atmospheric Programs, told USINFO, “that efforts like CCX and efforts that states are taking, such as the Regional Greenhouse Gas Initiative or the California cap-and-trade program, are all useful efforts” for achieving President Bush’s announced 18 percent reduction in U.S. greenhouse gas intensity by 2012.

INTERNATIONAL INTEREST

EPA experts have met with counterparts in more than 50 countries to share EPA’s decades of experience in cap-and-trade programs, Harvey said, “and we’re starting to see other countries adopt cap-and-trade programs.”

The European Union Emission Trading Scheme, launched in 2005, is now the world’s largest multinational greenhouse gas emissions trading scheme. And in June, Australian Prime Minister John Howard announced a new Australian Carbon Trading Scheme, to be introduced by 2012.

Cap and trade, Harvey added “is a tool that’s starting to penetrate globally as people see the value of using it.”

More information about U.S. government cap-and-trade programs and climate change is available on the EPA Web site.

More information about the Chicago Climate Exchange is available on that organization’s Web site.

(USINFO is produced by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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