SETTING THE BASELINE OR CAP

Efficiency vs environment

Even proponents of trading admit that there will inevitably be a conflict and an implicit trade-off between the goals of reducing costs and improving environmental quality (Atkinson amp; Tietenberg 1991: 20-6; Hahn amp; Hester 1989: 147).

• environmental and health protection

• technical feasibility - available technology

• economics - balancing costs

• politics - influence of vested interests and political acceptability.

In practice, baselines and caps tend to be based on economics and poli­tics rather than on what is technically feasible to protect the environment and human health. Emissions trading in greenhouse gases, for example, aims to reduce the emissions from industrialised nations by an average of 5 per cent rather than the 50-70 per cent that is thought to be neces­sary to prevent global warming (Bachram 2004: 2-3; Moore 2004a: 2-3).

What is good for the environment is not necessarily good for encour­aging trade in a market. If the cap is too low and too few allowances are issued, or the baseline standard is too low, there will be few allowances or reduction credits for sale - because few firms will be able to reduce their pollution levels below the allowances they are allocated or the emissions standards set. Yet a low cap may be essential to protecting the environment.

Political factors are also influential, as they are with legislation. Nutrient trading hasn't really taken off in the USA, partly because caps on nutrient levels are not strict enough to force point sources to buy allowances from farmers. But stricter caps have not been imposed because they would be politically unpopular with the industrial pol­luters that would be the buyers (Hawn 2005b).

Baseline air emission levels are usually set in the USA by making them the same as existing licence limits. Opponents of emissions trading point out that these established licence limits have not enabled states to meet air quality goals so that, logically, while further reductions in emis­sions are needed, surplus rights should not be traded.

Several US states have allocated allowances on the basis of what a firm has been discharging in the past - that is, grandfathering. But if a firm's actual emissions are overestimated, so that allowable emission rates are set higher than actual emission rates to start with (which, it has been argued, happens in many states), a firm may get more allowances than it needs or credit for reductions it has not actually made. This is one reason why offsets have often not resulted in any noticeable improve­ment in air quality (Hahn amp; Hester 1989: 122).

Los Angeles Regional Clean Air Incentives Market

The Los Angeles Regional Clean Air Incentives Market (RECLAIM) pro­gramme was designed to reduce emissions of sulphur dioxide and nitrous oxides by 13 000 tons in ten years. It began operation in 1994, but by 1997 no significant reductions had occurred, according to an internal audit by the South Coast Air Quality Management District. Air pollution allowances had been issued on the basis of each company's worst emis­sions in the previous five years - which meant that companies were able to inflate the baseline of allowable emissions by some 40 000 tons overall above the level they were emitting in 1994 (Belliveau 1998; Drury et al. 1999: 264-5).

As a result, allowances were very cheap for a few years, many being given away for nothing because few companies needed them. There was therefore no pressure to install pollution controls. Whereas nitrous oxide (NOx) emissions from industrial facilities had been reduced by around 37 per cent between 1989 and 1993 under the previous regulations, in the new trading regime they were reduced by less than 3 per cent between 1994 and 1996, as opposed to a forecast 30 per cent (Drury et al.

By 2001 it was clear that the 30 per cent goal was not going to be met. What is more, the rate of emissions reductions had slowed to a crawl, and concentrations of NOx in the air were actually increasing. By this time, however, NOx allowances were in short supply because of eco­nomic growth. Speculation caused their price to rise to $45 000 per ton in a very short time, causing panic among companies now needing to buy allowances. As a consequence of power industry pressure, the govern­ment was forced to withdraw power plants from the RECLAIM pro­gramme. They are now required to meet traditional pollution control regulations (CPR 2005; Moore 2004a, 2004b).

EU emissions trading

When the EU emissions trading system was introduced in 2005, analysts believed that many governments had been too generous in allocating allowances to local firms because they feared these industries would be at a competitive disadvantage if they had to buy extra allowances. A study by Ilex Energy Consulting (2005) for WWF examining six EU coun­tries found that none of them had set caps that went beyond business as usual and none of the six would meet their agreed Kyoto obligations. Because allowances were not in great demand, the market opened at ˆ 8 per tonne and settled around ˆ 23 a few months later, far less than would be necessary to provide an incentive to reduce emissions (Pearce 2005a).

In the United Kingdom, 'with the exception of power generators, the UK government has ended up giving rights to most industrial sectors to emit yearly at least as much carbon dioxide as they annually emitted de facto between 1998 and 2003' (Lohmann 2004: 12). New Scientist reported:

The UK, despite publicly banging the drum for action on climate change, has ended up being one of the worst offenders. When envi­ronment secretary Margaret Beckett published her draft allocations for British industry in May 2004, they added up to a total of 736 million tonnes of CO2 over the next three years. This, according to calculations by the Department for Environment, Food and Rural Affairs, would require a reduction of less than 1 per cent compared with business-as-usual emissions. Even so, intense lobbying by industry followed... in October 2004, the expected business-as-usual emissions were substantially raised, and the permitted emissions raised to 756 million tonnes. (Pearce 2005a)