Cap and Trade - Acid Rain Solutions

Question 1. CAP AND TRADE - ACID RAIN SOLUTIONS

In the 1980s, policymakers in the United States faced a difficult problem: Acid precipitation. For years, Midwestern lawmakers had the "whip hand" in the debate over whether to impose acid rain controls on the big, coal-burning utility plants in the Rust Belt (Hager, 1989). Acid compounds and their precursors in the atmosphere and in deposition from the atmosphere represented a major national and international threat to Earth's resources, ecosystems, materials, visibility, and the public health (EPA). Congress and the Executive used scientific information based on multiple studies, recommendations, and findings from the scientific community that identified the major principal sources and precursors of acid precipitation. It was found that the problem originated from emissions of sulfur and nitrogen oxides as byproducts from the use and combustion of fossil fuels (EPA). Unfortunately, when the problem was first uncovered, President Ronald Reagan, aligning with the coal industry and utility companies, only decided to study the problem. During the 1980's, citing uncertainties about the science of acid rain and concerns about jobs and utility rates, Midwesterner lawmakers, policy formers, and interests groups, managed to bottle up and kill bill after bill. They infuriated environmentalists and frustrated congressional colleagues, who tried to "mollify the Midwestern coalition with offers of national electricity taxes to help ease the heavy expense - and to prevent the job losses - of cleaning up coal-burning utilities" (Hager, 1989).

Eventually George H.W. Bush was elected president along side his Midwestern vice president, former Senator Dan Quayle of Indiana, and pushed a clean-air rewrite package (HR3030) with acid rain provisions. Congress laid out its purpose in Title IV of the Clean Air Act: The purpose of this title is to reduce the adverse effects of acid deposition through reductions in annual emissions of sulfur dioxide of ten million tons from 1980 emission levels, and, in combination with other provisions of this Act, of nitrogen oxides emissions of approximately two million tons from 1980 emission levels, in the forty-eight contiguous States and the District of Columbia (EPA). Of course, HR3030 remained on hold for some time because the House Energy and Commerce Committee had Midwestern panel members searching for ways to defray the heavy costs that Bush's acid rain proposals would impose on their districts and states (Hager 1989). Philip R. Sharp (D-Indiana), chairman of the committee's Subcommittee on Energy and Power, stated that he "would stall the clean-air legislation in his subcommittee to dramatize his concerns."

In order to alleviate and solve this issue of acid precipitation and the negative economic and ecological effects, Bush sided with an idea that would allow power plant operators to buy, sell and trade credits to pollute, with a goal of cutting their overall emission in half (EPA). Committee Chairman John D. Dingell (D-Michigan) proposed this cost sharing program that granted a large new quantity of SO2 emissions allowances. Bush told lawmakers and business leaders "We will allow flexibility in how industry achieves these goals" (SFgate). Cap-and-trade regulation starts with limits on tons of pollutant (cap) that can be emitted in a certain period and for a particular region or sector. Most emissions trading mechanisms are based on a "cap," expressed as a limit on tons of pollutant that can be emitted in a given period. Normally, caps (or emission budgets) limit emissions in tons per year. Caps are set based on a judgment (often by political leaders) about the level of emissions that can be tolerated without adverse effects on health or the environment (EPA / REPP, 2000).

In the electric power sector, regulators would then issue allowances (permissions to emit a ton of pollutant) to generators. There are a few ways for regulators to issue allowances (REPP, 2000). These include auctions and generator-by-generator allocations based on applying a uniform emission rate (consistent with achieving the cap) to historical or projected generation (e.g. pounds/megawatt hour). In the CAA, acid rain provisions, Congress specified the SO2 allowances that each electric power plant source would receive, based roughly on a uniform emission rate (1.2 lbs/mmBtu) applied to the plant's historic (annual) electric power production (EPA).

An individual generator may decide to comply by limiting its emissions to the equal amount to its given allowances. It could also decide to emit less than the amount allowed, and sell off unused allowances to generators that need them generators that do not hold enough allowances for their planned amount of emissions). This allows for cleaner generators to gain financial rewards and incentives, and "dirty" firms must pay a price for their higher emissions. The amount of money each allowance represents, and therefore the total financial reward for cleaner generators depends upon the demand for allowances, and the ability of generators to furnish spare allowances (REPP, 2000).

The cap and trade system worked by having these new laws set a cap (mentioned earlier) on emission, and over time required electric utilities to reduce sulfur dioxide emissions by 50% from 1980 levels. This would be viable because the pollution credit trading system sprung up as a means to attain these new levels. If a power plant could cut its emissions below the cap level, the plant could sell its credits to another firm / plant operator that was not able to meet the cap level. This was a huge idea because it was economically feasible since the costs for utilities and consumers were less than half of what they would have been say if the U.S. Environmental Protection Agency (EPA) ordered all firms to install scrubbers (EPA). Politicians liked this idea since there was a "concrete set goal" for emission cuts and economists viewed this method as a relatively cheap way of meeting the cap. The industry and cap and trade opponents later on lauded this flexible approach and the environmental results were published citing that the program reduced sulfur dioxide emissions by 40% from 1990 levels and cut nitrogen oxide emission to about half of what they would have been without the program (EPA).

Congress used information from the EPA to help decide if the cap and trade system would be viable and by 2010, the EPA estimates that complying to the law will cost utilities and consumers about $1 billion to $2 billion a year, which is a quarter of what was the original forecast (SFgate). The 1990 CAA amendments included multiple provisions that require or encourage use of emissions trading or other forms of economic instruments to control