http://gristmill.grist.org/story/2007/2/18/205116/813
Emissions trading: A mixed record, with plenty of failures
Posted by Gar Lipow at 10:20 AM on 19 Feb 2007
In arguments over carbon trading, both sides often assume that past
emission trading schemes have been notably successful. But in
practice, trading schemes have lowered emissions more slowly than
rule-based methods, and have discouraged rather than encouraged
innovation. Even in the area where emissions trading shows some
success -- lowering gross compliance costs to industry -- net costs
are probably higher than rule-based alternatives.
SOX emissionsCompare the success of the often-touted sulfur dioxide
trading system the U.S., instituted in 1990, with the speed and
quantity of reductions under rule-based systems during the same
period. U.S. SO2 emissions dropped by 31% between 1990 and 2001 [1].
Over the same period of time, under old fashioned rule-based
regulation, Germany reduced its emissions by 87% [2], Italy by 62%
[2], and Western Europe as a whole by 57% [2].
SOX per capitaIn both absolute and per capita terms, Western Europe
and the individual nations within it have less acid rain-producing
pollution than the United States [3]. This was not true when they
began their regulatory programs in 1982.
Another often-cited success, the U.S. lead trading system, represented
only five years out of a 23-year process that began with the
requirement that all cars made after 1974 run only on unleaded
gasoline. By the time lead trading was introduced in 1982, only 20% of
light-duty vehicles still accepted leaded gas. Even so, under the
proposed regulations trading replaced, reductions that took until 1987
to complete (thanks to banked credits) would have been required by
1986 [4]. In addition, reporting-error rates were estimated between
14% and 49% -- thanks to minimal verification and enforcement of
reporting requirements. There were also cases of outright fraud, with
purchased credits not matching credits sold [4]. Final elimination of
remaining use of lead in gasoline was completed in 1996.
In contrast, Japan completed a phase out comparable to the U.S.
1974-1987 process between 1970 and 1980 [5] -- about a three year
shorter time, and without the enforcement problems that come with a
trading system. Slovakia and China were able to eliminate leaded
gasoline in less than half a decade via entirely rule-based means --
though, as their existing infrastructure investment in lead-using
refineries was not on the same scale as rich nations, it is not an
entirely fair comparison.
These two examples at least met their targets, albeit more slowly than
comparable rule-based regulations. But they were comparatively simple
and transparent systems, involving trading among only a few point
sources. In contrast, the South Coast Air Quality Management District
(SCAQMD) experimented with two programs that were closer to the Kyoto
emissions trading in complexity. They involved multiple emission types
(N2O and SO2), multiple types of sources (refiner, utilities and
cars), and came nowhere close to meeting their defined goals.
The Center for Progressive Reform describes the programs and results well:
In the mid-1990s, SCAQMD launched the RECLAIM program, which allowed utilities and other major
stationary sources to trade SO2 and nitrogen oxide (NOx) credits under a cap on total emissions,
and the Rule 1610 "Car Scrapping" program, which allowed operators of large stationary
sources to buy their way out of compliance with CAA controls by paying owners of old, dirty cars
about $600 per vehicle to take them off the road. The RECLAIM program's cap was set too high, in
part because planners based initial allocations of credits on historically higher levels of
pollution for covered sources, as opposed to the lower levels of actual emissions at the time the
program began. Compounding this error, the program supplanted, as opposed to supplemented existing
technology-based requirements, leaving no "safety net" to prevent excessive emissions
from individual sources. As a result of these threshold mistakes, in the first three years of its
operation, the program resulted in a decrease in actual emissions that was very modest--about 3
percent.
Because the initial cap did not create a sufficient scarcity of allowances
to motivate covered plants to install pollution controls, few installed
controls that would enable them to generate additional allowances as the cap
declined. Apparently, most owners and operators concluded that they could
purchase credits later, as the cap declined. In fact, at one point, NOx
allowances were so plentiful that sources gave 85% of them away for free.
The ultimate calamity for the system came in the spring of 2001, when a
short supply of allowances pushed the price of NOx allowances as high as
$45,000/ton. In the midst of the hysteria provoked by the California energy
crisis, SCAQMD hastily pulled utilities from the system, giving them a
three-year grace period to return to compliance with traditional regulatory
requirements.
The SCAQMD car scrapping program contained similarly fundamental flaws in
design, placing no limits on the amount of allowances stationary sources were
able to purchase and failing to supervise the retirement of the cars that
supposedly generated emissions reductions. The predictable result was the
creation of extreme toxic hot spots containing intolerably high levels of
pollution in the neighborhoods located in the vicinity of four marine terminals
owned by Unocal, Chevron, Ultramar, and GATX. Exposure to these hot spots
resulted in a cancer risk greater than 150 in 1,000,000 for people living in
those neighborhoods, the vast majority of whom were people of color.
Compounding these problems, SCAQMD auditors found rampant fraud in the program
because owners of old vehicles were paid to retire their vehicles, the bodies
of the cars were scrapped, but the engines were transferred into other vehicles
that kept on running. Further, stationary sources appear to have underreported
their emissions significantly, in order to save money by purchasing fewer
allowances.
(See also note [6].)
So emission trading has a record of producing slower results than
conventional regulation, with at least one example of complete failure
to meet a goal. But doesn't the increased flexibility at least
encourage innovation? The empirical record says no:
The best empirical study of sulfur trading to date ("Regulation as the
Mother of Invention: The Case of SO2 Control," Margaret Taylor, Edward
S. Rubin, David A. Hounshell, Law and Policy 27, No 2, April 2005, pp.
348-78, p. 372.) says ...
... the majority of the performance and capital cost improvements in the
dominant technology to achieve SO2 control occurred before the 1990 CAA ...
Consequently, the weight of evidence of the history of innovation in SO2 control
technology does not support the superiority of the 1990 CAA--the world's biggest
national experiment with emissions trading--as an inducement for environmental
technological innovation, as compared with the effects of traditional environmental
policy approaches. Repeated demand-pull instruments, in the form of national
performance-based standards, along with technology-push efforts, via public
RD&D funding and support for technology transfer, had already clearly
facilitated the rapid maturation of wet FGD system technology that diffused from no
market to about 110 GWe capacity in twenty-five years. In addition, traditional
environmental policy instruments had supported innovation in alternative
technologies, such as dry FGD and sorbent injection systems, which the 1990 CAA
provided a disincentive for, as they were not as cost-effective in meeting its
provisions as low sulfur coal use combined with limited wet FGD application
So SO2 emissions trading helped produce no major innovations, and
actually provided a disincentive for technologies on the verge of
maturation.
What about lead trading? It probably neither speeded nor slowed
development of technology -- since as with sulfur, mature technologies
were already in place when trading was instituted, and unlike sulfur,
there were no near-term alternatives that could be discouraged.
However, credits from refineries with low lead emissions probably
caused delays in implementing zero lead technologies because credits
were available from low lead production [4]. In addition, the general
delay caused by the trading system also probably delayed some
deployment of other improvements.
The RECLAIM fiasco had obvious consequences; if it drastically slowed
emissions reductions and failed to meet targets, it is unlikely it
provided much incentive for innovation. Most major point sources did
absolutely nothing, innovative or otherwise, relying on continued
availability of credits instead. In short, a badly designed emission
trading scheme resulted in the classic free rider scenario; a great
many players did nothing, assuming others would reduce emissions
enough to provide credits for them to buy. There were promising
technologies being financed by auto registration fees, whose failure
RECLAIM may have contributed to. These included low emitting burners
and turbines. There was also an emerging NOx reduction technology,
SCONOx, which was "more expensive than the dominant selective
catalytic reduction method, but arguably could have penetrated the
market if there had been stringent regulation generating less 'spatial
flexibility ' about where reductions were made." [7]
In general, it is not surprising that emission trading discourages
innovation. The whole point of spatial flexibility is to encourage use
of all cheap means before turning to expensive ones. Simple procedures
like using low sulfur coal will usually be cheaper than, say,
replacement of coal plants with natural gas plants or wind turbines.
Emission trading does have one advantage: It apparently does lower
gross compliance costs to polluters. (For example, it is generally
agreed that lead trading saved polluters 20% compared to conventional
regulation.) Of course some of that savings comes from trading rules
being easier to cheat, rather than being easier to obey.
But more importantly, as Amory Lovins is fond of pointing out, we need
to count all costs, and all benefits -- to make decisions on the basis
of the net, not the gross. Net costs with emission trading are
probably not lower in most cases. And the cost/benefit ratio is
probably worse in every case.
The dynamic cost of postponing technology innovation is going to be
higher in most cases than developing the technology earlier. Normally
the long-term trend in standards is to tighten them. If regulations or
carbon taxes (or a combination of both) force development and
deployment of emissions reduction technology in a few cases that can
meet standards no other way, then the price will be lower at a later
stage when standards tighten and it must be deployed more widely.
Emission trading, on the other hand, by postponing such developments,
often will ensure that when tighter standard go into effect the
technology is not as mature, and thus much more expensive at the point
when it has to be put into widespread use. (In the case of carbon
credits, the intention is to continually tighten standards -- so this
argument applies even more strongly here than in other cases.)
Secondly, there is the question of total benefits. There are several
ways conventional regulation tends to produce more benefits than
emission trading:
* Overshoot and efficiency gains: In the absence of emission
trading, it is hard to comply exactly with a stringent regulation. If
compliance requires significant capital investment, normally a company
will look for something that provides more efficient production
(either reducing inputs or increasing outputs) as a side effect of
complying. The result often is an emission reduction greater than
required, along with an improved process. I think you could argue that
U.S. deregulation madness is part of the reason a lot of U.S.
industries are losing competitiveness -- not just to nations like
China that have access to cheap labor, but high-wage countries which
use more effective technologies.
In addition, emission levels are often set more by political
pressure than scientific evaluation -- meaning that they are almost
always too low. Overshoot, just on the emission level alone, probably
provides additional benefits far outweighing additional costs -- in
terms of additional lives saved at low additional cost.
Under emissions trading, any company that produces excess
reductions will either sell them to another company, or bank them for
future use. Thus trading systems almost never end up with a net
long-term overshoot.
* Reductions in other pollutants: most solutions that respond to
stringent regulation reduce more than one pollutant. For example,
substituting natural gas for coal, or wind for natural gas, reduces
not just SOx, but NOx, CO2, and even methane.
One way Germany achieved such a big sulfur reduction was a much
greater implementation of wind than in the U.S. -- in spite of having
lower quality wind resources. Further, they began this before the
price of wind technology dropped to levels competitive with natural
gas. So they spent a lot more per unit of reduction than the U.S. did
under sulfur trading. But Germany greatly reduced its greenhouse
emissions, and air pollution of all types. And it also competes with
Denmark for the large scale wind turbine market -- something the U.S.
does not do very well. The U.S. sulfur trading market was probably the
cheapest choice we could have made. But can anyone argue it had a
better cost/benefit ratio than the German investment?
-----
References
[1] David Stern, "Reversal of the trend in global anthropogenic sulfur
emissions", Global Environmental Change 16 (2006) 207-220. David
Stern's paper (PDF) describes how he derived data for a database of
human made SOx emissions from 1850 - 2001.
Stern's spreadsheet for North American data is made freely available
at http://www.rpi.edu/~sternd/NAmerica.xls (Excel Spreadsheet).
[2] David Stern's spreadsheet for Western European data is made freely
available at http://www.rpi.edu/~sternd/WEurope.xls (Excel
Spreadsheet).
Bless all analysts who put years into gathering their data and then
freely share that data. Because anyone can have an opinion ...
[3] I simply combined David Stern's numbers with midyear population
from the U.S. census International Database to derive per capita
figures. http://www.census.gov/ipc/www/idbagg.html
[4] Regulation of Fuels and Fuel Additives; Banking of Lead Rights, 50
Fed. Reg. 13116, 13119 (Apr. 2, 1985) for regulation that would have
required phase out by 1986; for banking lasting through 1987 - Robert
W. Hahn & Gordon L. Hester, Marketable Permits: Lessons for Theory and
Practice; U.S. GAO, Vehicle Emissions: EPA Program to Assist
Leaded-Gasoline Producers - David M Driesen, "Does Emissions Trading
Encourage Innovation?", Environmental Law Review, 33 ELR 10094 1-2003
Supra Note 143 - PDF
[5] Magda Lovei, Phasing out lead from gasoline: worldwide experience
and policy implications, World Bank Technical Paper No. 397, Pollution
Management Series, The International Bank for Reconstruction and
Development/The World Bank Washington D.C., January 1998. Page 15. PDF
[6] Anne Egelston, Maurie J. Cohen, "California RECLAIM's market
failure: lessons for the Kyoto Protocol", Climate Policy Volume 4
No.4, 27/May/2005.
[7] Larry Lohmann, Carbon trading, a critical conversation on climate
change, privatization and power, development dialog no. 48, September
2006, Dag Hammarskjöld Foundation, Uppsala, Sweden. P109. Book-Size
PDF
