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In recent years, emissions trading has become an important element of programs to control air pollution. Experience indicates that an emissions trading program, if designed and implemented effectively, can achieve environmental goals faster and at lower costs than traditional command-and-control alternatives. Under such a program, emissions are capped but sources have the flexibility to find and apply the lowest-cost methods for reducing pollution. A cap-and-trade program is especially attractive for carbon trading market in usa global pollutants such as greenhouse gases because their warming effects are carbon trading market in usa same regardless of where they are emitted, the costs of reducing emissions vary widely by source, and the cap ensures that the environmental goal is attained.
The authors derive five key lessons from this experience. First, emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Second, the use of emissions trading has enhanced—not compromised—the achievement of environmental goals. Third, emissions trading has worked best when the allowances or credits being traded are clearly defined and tradable without case-by-case certification.
Fourth, banking has played an important role in improving the economic and environmental performance of emissions trading programs. With growing Congressional interest in programs to address climate change—including the recent introduction of economy-wide cap-and-trade legislation controlling greenhouse gas emissions—the application of lessons learned from previous emissions trading programs is timely.
The authors and the Pew Center are grateful to Dallas Burtraw and Tom Tietenberg for reviewing a previous draft of this report. Emissions carbon trading market in usa has emerged over the last two decades carbon trading market in usa a popular policy tool for controlling air pollution.
Indeed, most major air quality improvement initiatives in the United States now include emissions trading as a component of emissions control programs. The primary attraction of emissions trading is that a properly designed program provides a framework to meet emissions reduction goals at the lowest possible cost. It does so by giving emissions sources the flexibility to find and apply the lowest-cost methods for reducing pollution.
Emission sources with low-cost compliance options have an incentive to reduce emissions more than they would under command-and-control regulation. By trading emission credits and allowances to high-cost compliance sources, which can then reduce emissions less, cost-effective emission reductions are achieved by both parties.
When inter-temporal trading is allowed, sources can also reduce emissions early, accumulating credits or allowances that can be used for compliance in future periods if this reduces cumulative compliance costs. Accordingly, cap-and-trade programs achieve the greatest cost savings when the costs of controlling emissions vary widely across sources or over time.
In practice, well-designed emissions trading programs also have achieved environmental goals more quickly and with greater confidence than more costly command-and-control alternatives. Emissions trading has achieved prominence beyond the United States largely in the context of discussions regarding implementation of the Kyoto Protocol, a proposed international agreement carbon trading market in usa control emissions of carbon dioxide CO 2 and other greenhouse gases.
The Kyoto Protocol provides for the use of various emissions trading mechanisms at the international level. Some countries already are developing emissions trading programs while the process of ratifying the Protocol moves forward.
Indeed, proposals to control GHG emissions in the United States also include the use of emissions trading. The theoretical virtues of emissions trading have been recognized for many decades—the basic elements were outlined in Coase and elaborated in Dales —but actual emissions trading programs have been brought from the textbook to the policy arena mostly in the last decade. It is important to recognize, however, that while properly designed emissions trading programs can reduce the cost of meeting environmental goals, experience does not indicate that significant emissions carbon trading market in usa can be obtained without costs.
Emissions trading can be an effective mechanism for controlling emissions by providing sources with the flexibility carbon trading market in usa select the lowest-cost opportunities for abatement, but it does not make costs disappear.
Moreover, emissions trading programs must be designed properly in order to realize their potential cost-reduction and environmental compliance goals. As with any emissions control program, poor design is likely carbon trading market in usa lead to disappointing results.
Experience with emissions trading, including both the design and operation of trading programs, provides a number of general lessons for future applications. This carbon trading market in usa reviews the experience with six emissions trading programs with which one or more of the authors have considerable experience:. Based on this experience, this report identifies and discusses five general lessons carbon trading market in usa the design and implementation of emissions trading programs, and two considerations of particular relevance for GHG applications.
Emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Experience shows that properly designed emissions trading programs can reduce compliance costs significantly compared to command-and-control alternatives. While it is impossible to provide precise measures of cost savings compared to hypothetical control approaches that might have been applied, the available evidence suggests that the increased compliance flexibility of emissions trading yields costs savings of as much as 50 percent.
The use of emissions trading has enhanced—not compromised—the achievement of environmental goals. While some skeptics have suggested that emissions trading is a way of evading environmental requirements, experience to date with well-designed trading programs indicates that emissions trading helps achieve environmental goals in several ways.
For one thing, the achievement of required emission reductions has been accelerated when emission carbon trading market in usa requirements are phased-in and firms are able to bank emissions reduction credits. Finally, properly designed emissions trading programs appear to provide other efficiency gains, such as greater incentives for innovation and improved emissions monitoring.
Emissions trading has worked best when allowances or credits being traded are clearly defined and tradable without case-by-case pre-certification. Several different types of emissions trading mechanisms have been implemented. Their performance has varied widely, and these variations illuminate the key features of emissions trading programs that are most likely to lead to significant cost savings while maintaining or exceeding environmental goals.
The turnaround in perception of emissions trading over the last decade—from a reputation as a theoretically attractive but largely impractical approach to its acceptance as a practical framework for meeting air quality goals in a cost-effective manner—largely reflects the increased use of averaging and cap-and-trade type programs.
These early EPA programs emphasized case-by-case pre-certification of emission reductions and were characterized by burdensome and time-consuming administrative carbon trading market in usa processes that made trading difficult.
The averaging and cap-and-trade programs have been much more successful. While the use of cap-and-trade or averaging does not guarantee success, and the problems with the reduction credit-based approach can be reduced by good design, avoiding high transaction costs associated with trade-by-trade administrative certification is critical to the success of an emissions carbon trading market in usa program.
Carbon trading market in usa success of any emissions trading program also requires several additional elements: Banking has played an important role in improving the economic and environmental performance of emissions trading programs.
Early advocates of emissions trading tended to emphasize carbon trading market in usa from trading among participants i. The experience with the programs reviewed here indicates that inter-temporal trading also has been important. The form that inter-temporal trading most often takes is credit or allowance banking, i. Banking improves environmental performance and reduces cumulative compliance costs.
Moreover, it has been particularly important in providing flexibility to deal with many uncertainties associated with an emissions trading market—production levels, compliance costs, and the many other factors that influence demand for credits or allowances. The initial allocation of allowances in cap-and-trade programs has shown that equity and political concerns can be addressed without impairing the cost savings from trading or the environmental performance of these programs.
Because emissions allowances in cap-and-trade programs are valuable, their allocation has been perhaps the single most contentious issue in establishing the existing cap-and-trade programs.
However, the ability to allocate this valuable commodity and carbon trading market in usa account for the economic impacts of new regulatory requirements has been an important means of attaining political support for more stringent emissions caps. Carbon trading market in usa, despite all the jockeying for allowance allotments through the political process, the allocations of allowances to firms in the major programs have not compromised environmental goals or cost savings.
There are other methods of allocating initial allowances—such as auctioning by the government and distributing on the basis of future information—that can affect cost savings and other overall impacts; but the major effects of the initial allocation are to distribute valuable assets in some manner and to provide effective compensation for the financial impacts of capping emissions on participating sources. Emissions trading seems especially well-suited to be part of a program to control greenhouse gas emissions.
The effects of GHG emissions thus are the same regardless of where the source is located and when the emissions occur within a broad time band.
This means that emissions trading can be global in scope as well as inter-temporal, creating an opportunity for the banking of emission credits, which allows emissions to vary from year to year as long as an aggregate inter-temporal cap is achieved.
Emissions trading is also well suited for GHG emissions control because the costs of reducing emissions vary widely between individual greenhouse gases, sectors, and countries, and thus there are large potential gains from trade. While other market-based approaches, such as emissions taxes, also would provide for these cost savings, the cap-and-trade version of emissions trading has the further advantage of providing greater certainty that an emission target will be met. Moreover, GHG emissions generally can be measured using relatively inexpensive methods e.
Furthermore, emissions trading provides important incentives for low-cost compliance sources initially outside the program to find ways to participate, and thereby further reduce costs. This opt-in feature is useful because an environmentally and cost-effective solution for reducing concentrations of greenhouse gases should be comprehensive and global, whereas initial controls on GHG emissions will—for political reasons—likely be limited, if not to certain sectors and greenhouse gases, then almost certainly to a restricted number of countries.
Therefore, an important criterion for initial measures is that they be able to induce participation by sources not yet controlled. The markets created by cap-and-trade programs provide incentives for sources outside the trading program to enter if they can provide reductions more cheaply than the market prices—a common feature of any market. Although, as discussed below, the voluntary nature of these incentives can create some problems, the ability to induce further participation is an important reason to include a market-based approach initially.
Indeed, it is hard to imagine how command-and-control regulations or emissions carbon trading market in usa could provide similar incentives to non-participants to adopt new measures to reduce greenhouse gas emissions. Opt-in or voluntary features have a strategic role that is likely to carbon trading market in usa their inclusion despite the potential problems associated with them. For example, in the Acid Rain Program, evidence indicates that many of the voluntary participants received credits for having emissions below the pre-specified baseline even though they took no abatement actions.
This experience suggests that the decision whether or not to include opt-in provisions should be determined by weighing the cost-saving benefits against the emissions-increasing potential. For greenhouse gases, the potential cost-savings benefits of including a voluntary element in the mandatory program are large because initial efforts are not likely to be comprehensive and global, as they must be eventually to achieve their environmental goals and be cost-effective.
Opt-in provisions also have value in improving measurement and monitoring techniques, in familiarizing participants with the requirements of emissions trading, and more generally with inducing participation of sources outside the trading program that can offer cheaper abatement. As a result, allowing participants outside the mandatory GHG emissions control program to opt-in has a strategic value that has not been prominent in other opt-in programs.
Indeed, it should be possible to learn from existing experience with opt-in programs how to reduce adverse effects while achieving cost-savings. Viewed from a broad historical perspective, carbon trading market in usa trading has come a long way since the first theoretical insights forty years ago and the first tentative application almost a quarter of a century ago.
Although still not the dominant form of controlling pollution in the United States or elsewhere, emissions trading is being included in an increasing number of programs and proposals throughout the world, and its role seems likely to expand in the future. Emissions trading has emerged as a practical framework for introducing cost-reducing flexibility into environmental control programs and reducing the costs associated with conventional command-and-control regulation of air pollution emissions.
Over the last two decades considerable experience with various forms of emissions trading has been gained, and today nearly all proposals for new initiatives to control air emissions include some form of emissions trading. This report has attempted to summarize that experience and to draw appropriate lessons that may apply to proposals to limit GHG emissions.
In doing so, we hope that the carbon trading market in usa has gained a better understanding of emissions trading and the reasons for its increasing importance as an instrument for addressing environmental problems. Six diverse programs constitute the primary U.
Most of the potential trades, and economic gains from trading, in these early systems were frustrated by the high transaction costs of certifying emission reductions. The first really successful use of emissions trading occurred in the mids when the lead content in gasoline was reduced by 90 percent in a program that allowed refiners to automatically earn credits for exceeding the mandated reductions in lead content and to sell those credits to carbon trading market in usa or bank them for later use.
This innovative program introduced a significantly different form of emissions trading, known as cap-and-trade, in which participants traded a fixed number of allowances—or rights to emit—equal in aggregate number to the cap, instead of trading on the differences from some pre-existing or external standard as had been the case in the early EPA trading programs and the lead phase-down program. The RECLAIM program is the first instance of emissions trading both supplementing and supplanting a pre-existing command-and-control structure that theoretically was capable of achieving the same environmental objective.
The Amendments to the Clean Air Act also provided enabling legislation for two other emissions trading programs. Emissions from mobile sources were more effectively and efficiently controlled by the introduction of mobile source averaging, banking, and trading programs. The mobile source programs followed the example of the lead phase-down program by allowing firms to create credits automatically for any reductions beyond a required uniform emission standard and to use these credits carbon trading market in usa lieu of more costly reductions elsewhere or later within the company and to sell them.
As was the case in the RECLAIM program, emissions trading was adopted as a means to attain environmental objectives more quickly and cost-effectively than had proved possible through conventional command-and-control regulation.
There are many lessons to be gained from the experience carbon trading market in usa these six programs, but the five most important lessons can be summarized as follows. First, the major objective of emissions trading, lowering the cost of meeting emission reduction goals, has been achieved in most of these programs.
Second, emissions trading has not compromised the achievement of the environmental goals embodied in these programs. If anything, and this is perhaps surprising, the achievement of those goals has been enhanced by emissions trading.
Third, emissions trading has worked best in reducing costs and achieving environmental goals when the credits being traded are clearly defined and readily tradable without case-by-case certification. Fourth, temporal flexibility, i. Fifth, the initial allocation of allowances in cap-and-trade programs has shown that equitable and political concerns can be met without impairing either the cost savings from trading or the environmental performance of these programs.