Emissions
The emissions markets are comprised of various pollutant credits:
- Sulfur Dioxide (SOx) Credits that address acid rain and Nitrogen Oxide (NOx) Credits that address both acid rain and the transmission of ground-level ozone (or “smog”) resulted from the 1990 U.S. Clean Air Act (SOx) and a 1994 Memorandum of Understanding developed by the Ozone Transport Commission (NOx);
- Renewable Energy Credits that capture the environmental premium resultant from the generation of electricity from renewable energy sources vs. fossil fuels and can be traded within various regional markets with regulated standard for renewable energy production;
- Carbon Credits that are collateralized by certified reductions in the emission of greenhouse gases (GHGs) that have been globally restricted under the Kyoto Protocol and increasingly under various state laws in the U.S.
Emissions trading is not a new phenomenon. In 1990, the United States amended the Clean Air Act and paved the way for the Acid Rain Program which capped sulfur dioxide (SOx/SOx) emissions thought to contribute to acid rain. In 1994, a similar program was created to control the emission of nitrogen oxide (NOx) in certain states. The result of these initial markets has been the substantial reduction of NOx and SOx in those areas targeted by the regulations as well as compliance costs that were below initial forecasts. For example, for the 4 years that the OTC NOx Budget Program was in place (prior to being incorporated into the larger federal system), emissions were reduced 34% below the 1995 target level and NOx allowances were in range of $1000 vs. the $1,200 to $2,400 per ton initially forecasted.
Cap-and-trade programs cap the total amount of emissions of the restricted pollutant and create tradable allowances that become the basis for a market. Individual companies are designated maximum allowances for emissions (or “caps”) over a base period and are heavily penalized for emissions above the cap for which they have not purchased additional credits to offset. Therefore, polluters must either reduce their emissions through operational changes and/or buy credits to offset emissions beyond their caps. Companies that don’t need all of their allotted credits can sell (trade) them at a profit or bank them for use in future years. Typically, the caps become more stringent over a pre-determined schedule in order to obtain the desired level of atmospheric pollution in an orderly but certain way. This allows regulated entities that will need to make substantial capital expenditures to achieve long-term compliance to manage their immediate marginal costs, and to over the long-term, invest in technologies and operational methodologies that provide permanent and sustainable pollutant reductions. Carbon emissions have been deemed to be particularly well suited to such market-based approaches because they do not cause acute, short-term, or localized impacts. Rather, the concern is for long-term accumulation of carbon emissions in the global atmosphere and the damages that may arise. Accordingly, the location and timing of emissions reductions can be more flexible, which a market-based system such as cap-and-trade can facilitate.