Emissions trading
[1][4][5][6][7] Emissions trading is a type of flexible environmental regulation[8] that allows organizations and markets to decide how best to meet policy targets.
To demonstrate compliance, a participant must hold permits at least equal to the quantity of pollution it actually emitted during the time period.
[12] In some schemes, a proportion of all traded permits must be retired periodically, causing a net reduction in emissions over time.
These studies used mathematical models of several cities and their emission sources in order to compare the cost and effectiveness of various control strategies.
In each case it was found that the least-cost solution was dramatically less costly than the same amount of pollution reduction produced by any conventional abatement strategy.
[20] Burton and later Sanjour along with Edward H. Pechan continued improving[21] and advancing[22] these computer models at the newly created U.S. Environmental Protection Agency.
The agency introduced the concept of computer modeling with least-cost abatement strategies (i.e., emissions trading) in its 1972 annual report to Congress on the cost of clean air.
Coase's model assumes perfectly operating markets and equal bargaining power among those arguing for property rights.
In Coase's model, efficiency, i.e., achieving a given reduction in emissions at lowest cost, is promoted by the market system.
[34] In reality, according to the held view, markets are not perfect, and it is therefore possible that a trade-off will occur between equity and efficiency (Halsnæs et al., 2007).
According to Bashmakov et al. (2001), regulation of these other entities may be necessary, as is done in other financial markets, e.g., to prevent abuses of the system, such as insider trading.
[42] Some economists have urged the use of market-based instruments such as emissions trading to address environmental problems instead of prescriptive "command-and-control" regulation.
Therefore, a polluter that affects water quality at a number of points has to hold a portfolio of licenses covering all relevant monitoring-points.
A Lagrange framework is commonly used to determine the least cost of achieving an objective, in this case the total reduction in emissions required in a year.
Uncertainty in future supply and demand conditions (market volatility) coupled with a fixed number of pollution permits creates an uncertainty in the future price of pollution permits, and the industry must accordingly bear the cost of adapting to these volatile market conditions.
Assuming no corruption and assuming that the controlling agency and the industry are equally efficient at adapting to volatile market conditions, the best choice depends on the sensitivity of the costs of emission reduction, compared to the sensitivity of the benefits (i.e., climate damage avoided by a reduction) when the level of emission control is varied.
If the government is able to stimulate the economy regardless of the cap-and-trade scheme, an excessively low price causes a missed opportunity to cut emissions faster than planned.
A price floor also provides certainty and stability for investment in emissions reductions: recent experience from the UK shows that nuclear power operators are reluctant to invest on "un-subsidised" terms unless there is a guaranteed price floor for carbon (which the EU emissions trading scheme does not presently provide).
Responsiveness to uncertainty: As with cost changes, in a world of uncertainty, it is not clear whether emissions fees or cap-and-trade systems are more efficient—it depends on how fast the marginal social benefits of reducing pollution fall with the amount of cleanup (e.g., whether inelastic or elastic marginal social benefit schedule).
[56] Command and control is a system of regulation that prescribes emission limits and compliance methods for each facility or source.
[43][59] The SO2 program was challenged in 2004, which set in motion a series of events that led to the 2011 Cross-State Air Pollution Rule (CSAPR).
NOx is a prime ingredient in the formation of ground-level ozone (smog), a pervasive air pollution problem in many areas of the eastern United States.
[63] Ozone season NOx emissions decreased by 43 percent between 2003 and 2008, even while energy demand remained essentially flat during the same period.
[65] In the United States the Environmental Protection Agency (EPA) classifies Volatile Organic Compounds (VOCs) as gases emitted from certain solids and liquids that may have adverse health effects.
[66] These include products such as gasoline, perfumes, hair spray, fabric cleaners, PVC, and refrigerants; all of which can contain chemicals such as benzene, acetone, methylene chloride, freons, formaldehyde.
[71]: 80 They are Shandong, Shanxi, Jiangsu, Henan, Shanghai, Tianjin, Liuzhou and China Huaneng Group, a state-owned company in the power industry.
[73] In the same year, the Chinese government proposed establishing a carbon market, focused on CO2 reduction later in the decade, and it is a separate system from the pollution permit trading.
[76][77] Linking systems can also be politically symbolic as it shows willingness to undertake a common effort to reduce GHG emissions.
[79][80] In 2014, the U.S. state of California (which is the world's fifth largest economy if it were a nation, between Germany and the United Kingdom in size) and the Canadian province of Québec successfully linked their systems.
The US Congressional Budget Office (CBO, 2009) examined the potential effects of the American Clean Energy and Security Act on US households.
