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Home arrow GreeniacsArticles arrow Environmental News arrow Capping Trading and Selling the Right to Emit
Written by Suzanne Heibel   
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Wednesday, 28 January 2009

Capping, Trading, and Selling the Right to Emit

An ideal human world would boast zero emissions, but we are a species whose livelihood depends on the consumption of energy. We use energy and we use a lot of it, and simple physics tells us that what come in must some how come out one way or another, and our form of energy exhale is usually in some sort of harmful green house gas emission. Counteracting the release of pollutants is a tough business in an economy dependent on the large corporations that are guilty of major emissions. Countries are looking to minimize polluting while keeping businesses alive. For many countries, including the United States, the government has decided that companies do have a right to emit, but in order to do so, they must stay below a pollutant baseline or purchase that right from a communal pot.

Assigning the Cap

The governments picks a number at random, okay they actually choose a very well-thought out amount, and say this is how many tons of “x” our city or region or country can pollute, total. “X” can mean carbon dioxide, sulphates that cause acid rain, or any other harmful pollutant. The current program in the U.S. is aimed at reducing acid rain through sulphates and nitrous oxides.1 First, each large emitter (usually a corporation) produces reports of their annual emissions and based on these numbers they are given permission to emit only a specific amount of a type of pollutant. This right to pollute comes in the form of a credit, which is representative of a quantity of tons of pollutants. Credits are awarded to all significant emitters and the total number of credits handed out is called the “cap.” To ensure that this actually works to reduce emissions, rather than remaining at a constant emissions level, the government selects an amount of credits that would lower green house gasses but would be a fair number as to not put anyone important out of business. 2

Regulations and credits must be abided by completely to guarantee that the system is effective in eliminating emissions. At the end of the emission period, companies must submit their actual emission levels, which are then compared to the allowances they were given at the beginning of the period. If businesses polluted more then their allotted tons, they would be severely fined or be subject to other penalties.3 Only total compliance--in the form of conceding the true quantity emitted—will ensure the system of emission limits actually produces results.

Trading

So now everyone has an appropriate amount of credits for their emission levels. Let's make this easy and say that 1 credit = 1 ton of CO2, and Company A received 10 credits and Company B was given 7 credits at the start of the emission period. As the year moves on, Company B begins moving towards cleaner energy and only ends up using 5 credits, meaning they have 2 extra. But Company A is expanding and still using dirty fuels, and in order to comply with regulations they need to acquire 2 more credits. Luckily, Company B has 2 extra so B sells those 2 credits to Company A, leaving A with 12 credits and Company B with 5. Sure, B looses the right to emit by 2 tons, but its move to renewable energies means that it doesn't need the extra rights. On top of that, A still abides by the laws, but is out a bunch of money because it had to spend the extra cash to pollute. The cap is still maintained but one company has moved in the environmentally correct direction while the other has learned that it costs to pollute.

Baseline and Credit Programs

Similar to Cap and Trade, baseline and credit programs want to depress pollutants, but this plan goes about it in a slightly different. Baseline emissions—as used in the famous Kyoto Protocol—do not put a cap on how much a region is commissioned to pollute.4 A common way of establishing a business's baseline is to simply look at its emissions history and go from there. Each polluter is given its own baseline, and at the end of the period, the actual emissions are reviewed. Baselines are also calculated so the business will not suffer profit losses from the set pollution standards. If the company stayed at the allowed level then great, but if the company went below this baseline, then the emissions saved are translated into credits, which can be kept, traded, or sold.5 If the emitter exceeds the given limit, then they must pay for the government for the extra credits they used but were not apportioned. If all the baselines combined are equivalent to the cap (in the cap and trade program), then ultimately the projects are synonymous.6 But with baselines there is no conjoined account of credits, baselines are assigned individually to sources, there is no set cumulative impact. Integrating baselines shows the full effect and determines if there is progress on emission control.

Another issue with baseline-and-credit programs is that they act as sort of an emissions scholarship. And emitters often times will increase their output in order to obtain a higher allowance.7 This way, they can pollute what they want without being penalized or reprimanded.

Do They Work?

Emissions trading and selling has both advocates and adversaries, one saying the scheme is a success while the latter criticizes pollution rights as hand outs. The European Union is currently the largest guinea pig in this controversial program as an effort to decrease the continent's emissions by 20% by 2020.8 The EU's program had a rocky start with deciding the amount of credits to allocate, and initially their overestimation lessened public confidence. Experts say that the plan is effective if the cost of a credit is greater or equal to the cost of emissions, but putting a price on an intangible consequence is complex. Under the Kyoto Protocol the EU may also buy credits from countries outside the Union, like Bolivia or Thailand, meaning there could be even more pollutants in Europe than originally allowed. Whether these schemes work or don't work, it is crucial to note the importance of their existence. We are moving in the right direction, even if we are sometimes static in our advancement towards eco-harmony.

Other related topics of potential interest:
For information about Carbon Offset Programs, please see the Greeniacs Article: http://www.greeniacs.com/GreeniacsArticles/Carbon-Offsets-How-Do-They-Work. For information about Renewable Energy Certificates, please see the Greeniacs Article: http://www.greeniacs.com/GreeniacsArticles/Renewable-Energy-Certificates.

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1 http://www.epa.gov/airmarkt/cap-trade/index.html.
2 http://www.epa.gov/airmarkt/cap-trade/index.html.  
3 http://www.fasb.org/project/emissions_trading_schemes.shtml.
4 http://socserv2.socsci.mcmaster.ca/~econ/mceel/papers/buckleyetal-cea2005-lrerc.pdf.
5 http://www.fasb.org/project/emissions_trading_schemes.shtml.
6 http://socserv2.socsci.mcmaster.ca/~econ/mceel/papers/buckleyetal-cea2005-lrerc.pdf.
7 Id.
8 http://www.energyportal.eu/reviews/emissions/how-does-the-european-co2-trading-work.html.




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