Emissions Trading is a Flop on Wall Street, but is it Reducing Pollution?
Remember emissions trading? Six years ago, it was all the rage, a new way to reduce pollution that reconciled the seemingly intractable forces of market capitalism and environmental protection. When Congress amended the Clean Air Act in 1990, politicians, some environmentalists, and many an industry executive, proposed market incentives as a way of curbing sulfur dioxide (SO2) emissions, instead of the traditional (and here’s that bad word again) regulatory approach.
The result was emissions trading, whereby coal-burning electric utilities and other industries could reduce SO2 emissions (the primary cause of acid rain) by buying and selling the right to pollute. It was supposed to go like this: Of the 8.9 million tons of S02 industries are permitted to emit, 249,200 tons were set aside to be auctioned. A utility having difficulty meeting the new federal limits on SO2 emissions could purchase an “allowance” (the right to emit one ton of SO2) from another utility that had reduced its emissions even lower than the federal goal. On the whole, the theory goes, pollution would be reduced, all thanks to market incentives. The concept was introduced to the Bush administration by the Environmental Defense Fund (EDF) to persuade it to go along with the Clean Air Act’s requirements that there be a 50 percent reduction of SO2 emissions by 2010.
So, six years since the Clean Air Act amendments were passed, does emissions trading work? That depends on who you ask. The Big 10 environmental groups that pushed for pollution credits in 1990 say the evidence is in: The program is working. Joe Goffman, an EDF senior attorney, calls emissions trading “one of the most successful programs that Congress has ever put together in the environmental area.” Goffman notes that data released by the Environmental Protection Agency (EPA) show that there was an SO2 reduction of 3.4 million tons last year. “At the same time,” he adds, “the cost of the program is significantly lower than even the most optimistic proponents anticipated back in 1990. You’re essentially looking at more emissions reductions at lower cost, and I don’t know how you can beat that as a formula.”
In one typical trade at last March’s EPA auction, Detroit Edison bought credits for 9,000 tons of pollutants, six percent of those on offer, for $603,000. The largest single sale was to Enron Power Marketing, which paid $7 million for 107,252 tons, 71 percent of the total.
Beyond EDF’s optimism, however, it’s plain that the market for the right to pollute has hit rock bottom. In the March EPA auction, the average price of a one-ton allowance was $68, down from $140 a year ago, and $250 in 1992. It’s a far cry from what utility executives were predicting in 1990, during the Congressional debate, when numbers like $1,000 a ton or more were bandied about. At the auction, there were as many buyers from high school ecology clubs and environmental groups (acting on a take-pollution-out-of-circulation strategy advocated by Greenpeace) as there were serious utilities. The utilities, though, bought thousands of tons; the greens one or two. “The green groups are ‘retiring’ pollution,” says Goffman. “It’s symbolism, but it’s important symbolism.”
Many now say the utility industry was “gaming”—using inflated and optimistic trading figures to bolster its cause, since it was strongly opposed to further regulations. It is not the only area where Congress was duped, some say. Reports now indicate that by 2009, the utility industry will annually cough up $2 billion to comply with Clean Air Act restrictions—not the $4 billion the EPA originally estimated.
Even assuming that the utility industry exaggerated when it was trumpeting the merits of emissions trading, prices are still much lower than expected. The EPA predicted trades to run from $500 to $600 a ton. Now, everyone is scrambling for a reason why pollution rights are trading for much less than that. One reason may be the design of the auction, which fails to establish a “reserve,” or bottom line price, for emission “lots.” Another reason may be simple supply and demand. “A lot of it has to do with the cheap price of sulfur coal,” says the EPA’s Melanie Dean, who also cites lower transportation costs as a factor in reducing prices. “It doesn’t do anything to negate the program,” she adds. Others aren’t so sure. Many worry the low prices will make it cheaper for utilites that don’t want to comply with the emissions cap to buy allowances and pollute considerably more.
The most comprehensive analysis on emissions trading has come from the federal General Accounting Office (GAO). According to the GAO’s December 1994 report, the cost savings have come from “intra-utility” trading—cutting emissions in one power plant and using the resulting allowances to cover emissions in another. Trading among separate utilities has been relatively scarce. This is not too surprising, analysts say; utilities are traditionally a low-risk industry, and many are loath to get into the tricky world of emissions trading. But the GAO’s analysis indicated that another $1 billion in savings could be achieved if more utilities agreed to participate.
“Could the system be more efficient? Yes,” says one GAO official, who says the trading needs some fine-tuning—and more effective regulations—to ensure that emissions really are reduced. “Right now, there’s no guarantee about where the allowances are going,” he says. “A pattern of trading could develop in which one region of the country suffers over another.”
Indeed, fears that acid rain problems would be merely redistributed appear to have been borne out. In upstate New York, for example, utilities traded pollution rights to the midwest, but the emissions ended up back in the northeast because of the prevailing winds. “The sky is not a sponge—it does not squeeze out and absorb things evenly over its entire surface,” says John Sheehan, a coordinator of the Adirondack Council, a non-profit environmental advocacy group. “There are going to be regional problems and environmental problems associated with allowance trading. In New York State, if we don’t reduce our pollution upwind of the Adirondack Park, we’re going to see more lakes die.”
New York State wants to ban its utilities from trading with other utilities in the midwest, but that prescription is imperfect. New York could sell pollution credits to a utility in, say, Florida, which could then sell them to a utility in the midwest—where they may end up back in New York again. “The EPA knows what’s coming out of the smokestacks and where,” says Sheehan, who would like to see more even stringent limits of emissions. “It’s pretty clear to the government what has to happen, it’s just a matter of getting Congress to order that it does.”