May 31, 2002
Just How Far Can Trading of Emissions Be Extended?
or once, Washington secured a bargain.
The 1990 amendments to the Clean Air Act set up a market-based system in hopes of reducing pollution from power plants more efficiently than regulation alone would, but no one thought the cuts would come cheap. The government estimated that eliminating emission of 10 million tons of sulfur dioxide — which causes acid rain — would cost companies up to $15 billion a year. Yet left to their own devices, the generators cut emissions for a fraction of that amount.
"The Congress and Environmental Protection Agency estimated that the acid rain program back in 1990 would be 5 to 10 times more expensive than it has been," said S. William Becker, executive director of an organization of state and local air pollution officials, who called the program one of the most effective pieces of environmental legislation ever put in place.
Now the White House wants to expand that approach, replacing existing air quality controls and applying "emissions trading" to other pollutants.
But environmentalists and economists alike warn that the Bush administration's "Clear Skies" initiative, while generally promising improvements, threatens to intensify pollution in certain "hot spots," and could create poor incentives for businesses.
"If all you had was emissions trading, you could pile up all the pollution in one place," said David D. Doniger, a former E.P.A. official who now sets policy at the Natural Resources Defense Council, an environmental advocacy group.
In the 1990's, sulfur dioxide levels fell broadly but they barely changed in the swath from Columbus, Ohio, to northern West Virginia; companies simply paid to pass on their obligations to reduce pollution in some of the worst spots. Mr. Doniger warned that abandoning existing safeguards would not only encourage concentrations of other pollutants it could even allow some plants to increase harmful emissions.
Environmentalists also lament Mr. Bush's failure to focus on greenhouse gases like carbon dioxide. Even those in the emissions trading business argue that carbon dioxide controls could help companies plan better, but Mr. Bush says they would raise electricity prices. Perhaps most important, no one seems to agree on how to dole out the right to pollute.
Emissions trading was just becoming popular in the late 1980's, when Congress set out to cut air pollution by power generators. Instead of ordering across-the-board reductions, though, lawmakers heeded economists who had long urged a focus on companies that could reduce emissions most cheaply. But the government had no easy way to identify those companies.
So Congress set up a trading system in which power companies can buy and sell "allowances" to emit sulfur dioxide. Each year, the number of allowances drops, with the goal of halving emissions by 2012.
At first, the companies worked with the government to divvy up 30 years' worth of allowances, to be traded on spot and futures markets. Russ Gillespie, managing director for environmental compliance at Duke Energy North America in Charlotte, N.C., knew he had a choice: keep Duke's allowances and keep polluting, or install expensive "scrubbers" to clean exhaust from plants.
Mr. Gillespie knew cutting pollution would be expensive — especially for Duke, because its exhaust was relatively clean already. Duke buys coal with about a pound of sulfur in each ton, but many Midwestern plants use coal with three times that amount. At one plant in Indiana, he added, the scrubbers would cost just as much, "but they would remove 90 percent of a much higher number" of sulfur dioxide particles.
As a result, it made sense for Duke to leave big pollution reductions to other generators. Mr. Gillespie said it might cost Duke $300 to collect a ton of sulfur, but it might cost other generators only $100. "They would be willing to meet in the middle," he said, by selling Duke an allowance for one ton at $200. "They would make $100, and Duke would save $100."
For monitoring, the E.P.A. required power generators to put electronic monitors on smokestacks. Companies that pollute too much pay $2,000, plus inflation, for each extra ton. The results have been better than even the program's original backers had predicted. Congress initially withheld 25,000 allowances a year to be sold for $1,500 each, plus inflation. Allowances now trade for $150 to $200.
"The United States sulfur dioxide system is a shining example of what worked," said Andrew O. Ertel, president of Evolution Markets, which completed more environment-related transactions than any other brokerage firm last year. "The reason it's worked is that the regulators put together a good system — a basic and simple system."
Mr. Becker, of the local officials' group, also heaped praise on the program. "It has been implemented with almost 100 percent compliance," he said. "It has achieved generally what Congress sought."
So why not extend the sulfur dioxide market to nitrogen-oxygen compounds and mercury? Most policy makers are in favor of expanding emissions trading, but some worry that Clear Skies relies on it too much. The program would eliminate some safeguards against local hot spots and could increase pollution at certain plants. A poor area could be especially vulnerable to finding itself on what Mr. Becker calls "the receiving end" of emissions trades.
A few sulfur dioxide hot spots have persisted east of Erie, Pa.; west of Kingston, N.Y. in Catskill Park; and around Oswego, N.Y., and Oak Ridge, Tenn., according to the National Atmospheric Deposition Program. Since 1995, a study by the United States Public Interest Research Group reported, 300 of the 500 dirtiest plants actually increased sulfur dioxide emissions. An administration official pointed out that many other hot spots had been "cooled" by the 1990 program, but admitted that there had been exceptions.
The 1990 amendments prohibit generators from using allowances bought from other businesses if air quality in their local area would fall substantially. In addition, "new source review" clauses prevent plants from adding generating capacity without controlling overall pollution. This combination helped to prevent even more hot spots, Mr. Doniger said.
That could change. "Emissions trading with the safeguards in the acid rain control program still brought down the cost of meeting the sulfur dioxide targets," Mr. Doniger said. "What the Clear Skies proposal tries to do is to wipe away all of those provisions and replace them with a cap-and-trade system that would be the sole mechanism out there for meeting national targets."
The administration, Mr. Doniger added, has already relaxed enforcement of new source reviews. But the administration official argued that such reviews were more trouble than they were worth.
"New source review has this perverse incentive for the dirtiest, oldest plants — the ones from the 1940's and 50's — to change nothing, to not modernize in any way," he said. "If they modernize, then they trigger a new source review that creates millions and millions of dollars in new investments. The whole reason why we want cap and trade is we want those plants to clean up."
An alternative proposal offered by Senator James M. Jeffords, a Vermont independent, would keep protections against hot spots in addition to capping carbon dioxide emissions and speeding up the elimination of other pollutants.
Mr. Becker's group is also trying to persuade power plants to uphold minimum local standards of air quality. It is no easy task. "The industry looks at the program on a macro scale," Mr. Becker said. "They say, `Things are going to get better, so why do we have to look at local impacts?' "
Senator Jefford's demand for carbon dioxide caps has some industry supporters but it has also raised hackles. Companies that run newer, cleaner generators want to know what investments will be necessary for the long term. "If you're paying top dollar for a power plant," Mr. Ertel said, "you're going to want to make sure that it's going to have the best available technology to run for the next 20 years."
But dirtier coal-fired plants want to avoid carbon dioxide controls as long as possible. "The only way to get cheap carbon dioxide reductions is a fuel switch away from coal towards natural gas," said Dallas Burtraw, a senior fellow at Resources for the Future, a nonpartisan environmental economics institute. "If Clear Skies passes in its current form, the industry would seemingly be justified in crying bloody murder if it was followed by new carbon controls."
Any new market-based plan will also have to deal with the issue of allocating new allowances. Because many utilities' profit margins were regulated in 1990, the distribution was a less contentious issue when Congress set up the acid rain program. Today, Mr. Burtraw said, "there is a potentially tremendous transfer of wealth in the initial distribution of emission allowances," running into billions of dollars.
At least three possible methods have surfaced in Washington. One, grandfathering, would give the most allowances to producers that have already spent the most to cut pollution — favoring what were once the dirtiest plants.
A second would allot allowances every year or two, giving more to bigger power generators but fewer to bigger polluters, thus rewarding the cleanest plants. Mr. Burtraw said this strategy could distort the power market, but Mr. Doniger said it would lower prices for consumers.
The third, an auction, is also controversial. In the acid rain program, the E.P.A. withholds 3.8 percent of allowances for an annual auction. Businesses initially liked the auction. "There was uncertainty about what these things would cost, and the auction really helped firms to settle on their investment plans," Mr. Burtraw said. But now, some see it as an annoyance.
"E.P.A. takes weeks to actually execute this auction," Mr. Ertel said. "It should be able to do this auction in an hour." Still, economists prefer the auction because it always sells the allowances to the companies that value them the most.
Mr. Doniger suggested a fourth alternative: give customers the allowances, and make companies buy from them.
"It's the public's air that's being used as a waste dump," he said. "There's a good argument that you ought to pay to use the dump."