By: Debra S. Knopman and Megan Susman
The concept of emissions trading is straightforward: Government sets a total cap on emissions of a pollutant from a group of sources such as power plants or factories.
Each source then gets emission "allowances" to cover most of its current emissions. Each allowance typically is worth one ton of emissions. Some emissions allowances retained by the government agency can be auctioned instead of given away.
During each compliance period, a source must hold enough emissions allowances to equal its actual emissions. If a source needs additional allowances to "cover" its actual emissions, it must acquire them from another source. Conversely, if a source can reduce its emissions below its allowances, it can trade the extras to other sources.
The following is a case study of how the system worked to the gain of the active players and incidental beneficiaries. The example also illustrates how quickly businesses internalize the concepts of emissions trading and identify market opportunities that might never be realized under strict command-and-control regulation.
Niagara Mohawk Power Corp. (NMPC) completed a unique trade with Arizona Public Service (APS) in which APS transferred 20,000 sulfur dioxide (SO2) allowances to NMPC. In return, APS received 2.5-million tons of CO2 reductions from NMPC. The CO2 emission reductions made by NMPC are below 1990 levels and were recognized by the U.S. Department of Energy as applying toward APS's voluntary greenhouse gas reduction commitment.
As a consequence of the transfer, the two companies pursued other environmental health benefits.
- First, instead of releasing the SO2 into the atmosphere, NMPC donated the 20,000 SO2 allowances to three non- profit environmental organizations for permanent removal from the emissions-trading market.
- Second, the tax benefit associated with the donation, expected to be about $650,000, will be reinvested in projects to further reduce CO2, including a CO2 reduction project in Mexico.
The previous study is just one example of emissions trading working where the program is grounded on accountability, accuracy of measurement and monitoring, and strict enforcement.
Contact: Megan Susman, Center for Innovation & the Environment, Progressive Policy Institute. Tel: 202-546-4482; E-mail: email@example.com
About the authors: Debra S. Knopman is the director of PPI's Center for Innovation & the Environment in Washington, DC. Megan Susman is a policy analyst with the Center.