Tradeable pollution rights

Tradeable pollution rights are a rights-based alternative to pollution charges. They allow firms to trade the right to emit specified amounts of particular pollutants. Such rights are increasingly being used as 'a major policy tool in both domestic and international strategies' to deal with pollution (Drury et al.

Tradeable pollution rights first emerged in the USA in the 1970s when it was felt that economic growth would be constrained by air quality laws enacted as part of the Clean Air Act. Under these laws, maximum allowable concentrations for specific pollutants were set for each region. The problem for regions which were already over the maximum allow­able concentrations (non-attainment areas) was how to achieve economic growth when industrial growth was likely to add to the air pollution load and therefore would be illegal.

Offsets

US regulators adopted an 'offset policy' in 1976. Initially, offsets occurred within companies. Firms that wanted to expand had to reduce the emis­sions from existing facilities so that the total amount of pollution emitted after they began operating any new plant was no more than they had previously been discharging.

This practice spread to external offsets. In Oklahoma City, for example, oil companies were persuaded by the local chamber of com­merce to reduce their hydrocarbon emissions enough to allow a new General Motors car manufacturing plant to be established in the area. In other cases, government facilities reduced their emissions to offset the effect of new private industries moving into their areas.

Companies wanting to establish in a non-attainment area could make way for their own pollution by paying to reduce the pollution of others. For example, an oil company planning to build a petroleum processing plant that would discharge sulphur dioxide and hydrocarbons arranged to pay for the pollution-control equipment for a dry-cleaning business, to buy and close down a chemical factory, and to buy low-sulphur fuel for some ships in San Francisco Bay (Seneca amp; Taussig 1984: 233).

Such arrangements have now been formalised into a market for offsets - in fact, offsets are mandatory for major new sources of pollution in non-attainment areas. Trade in pollution rights allows firms sited in an over-polluted area to voluntarily reduce their emissions and get 'emis­sion reduction credits' which in turn can be sold to firms wanting to move into the area. Offsets created by the closure of a pollution source may be owned by the local government. New firms have to buy or be allocated 1.2 emission reduction credits for each unit of emission that will come from their plants.

Germany has an offset programme for new companies wanting to establish in polluted areas (NCEE 2004: 27). Few other countries apart from the USA use offsets in this way, although offsets are an integral part of the Kyoto greenhouse protocol (see page 168).

Bubbles and banking

It was soon realised by US authorities that offset policies were not enough to reduce pollution to acceptable standards. Additional 'bubble policies' were introduced in 1979 to deal with established industries, policies which also started off being applied to individual companies. An imaginary bubble with a single opening is placed over an industrial complex which actually has more than one point of discharge. This means that discharges are not regulated individually, but standards are set for the total emissions from the complex.

In this way, the company can meet the standards by reducing the emissions from those of its operations where it can be done cheaply while leaving other operations with above-standard emissions. The concentra­tions and volumes of emissions from the various operations are averaged, and it is this average that must meet the standard. The regulator does not have to negotiate what pollution-control equipment should be installed at each outlet point. This is left up to the company to decide.

The bubble concept has since been extended from individual compa­nies to cover several industrial facilities owned by different companies.

The chemical company DuPont has estimated that its 52 plants achieved cost savings in the early 1980s of over 86 per cent from the use of regional bubbles (Seneca amp; Taussig 1984: 232).

Cap and trade emissions trading

Cap and trade emissions trading was first introduced in the USA after the Clean Air Act was amended in 1990 to include a national emissions trading programme for acid rain and to authorise states to set up their own emis­sions trading programmes to reduce smog in cities (Drury et al. 1999: 241).

Under cap and trade programmes, a limit is set for the total emissions of a specific pollutant, or set of pollutants, that may be emitted over a partic­ular period - usually a year - by specific industries in a particular region. A limit or cap is chosen that is intended to protect the environment. This cap is then divided into allowances that are allocated to specific firms, generally the larger firms in a particular industry sector with significant emissions, for example electricity-generating plants. A firm can sell any allowances surplus to its requirements to another firm that needs extra allowances, or save them for the future when they might be needed. In other words, the allowances become tradeable pollution rights (USEPA 2004a: 1).

Allocation

The two main ways of initially allocating allowances are usually referred to as 'grandfathering' and 'auctioning'. Grandfathering involves allocating allowances to firms on the basis of their past emis­sions. Firms that polluted more in the past are thus allocated a larger share of allowances.

Acid rain

The first cap and trade emissions trading programme was established in March 1993 when the US EPA auctioned off rights to emit sulphur dioxide (SO2), which is a primary cause of acid rain. The programme set a cap that required the total amount of SO2 discharged by power stations to be reduced by 2010 to half the levels discharged in 1980. Each allowance gives the owner the right to emit one ton of SO2. In addition, regulations limiting the SO2 discharged in particular areas were main­tained as a safety net to ensure that air quality standards would still be met in each region, despite trading (USEPA 2002a: 6).

SO2 allowances are now auctioned every year by the Chicago Board of Trade. Before 2005 they cost around $150-$200/ton, much cheaper than paying for flue-gas scrubbers to remove SO2 from plant emissions. It is claimed that this programme saves industry hundreds of millions of dollars each year compared with complying with legislation aimed at cleaning up SO2 to the same level. Limited reductions in SO2 emissions have been made with cheaper methods such as using low-sulphur coal (Kinsman 2002: 26; USEPA 2004a: 1).

Smog trading

The first smog trading scheme in the world was the Los Angeles Regional Clean Air Incentives Market, RECLAIM, introduced in 1994. This is a cap and trade programme in which 431 large firms were allocated tradeable allowances of smog-causing nitrogen oxides (NOx) and sulphur oxides (SOx) based on their past emissions. The cap has decreased over time (Drury et al. 1999: 247-8). Trading programmes of this kind have since proliferated around the USA for NOx and other air pollutants.

The Clean Air Interstate Rule (CAIR), introduced by the EPA in 2005, allows states to require power stations to comply with either the EPA's interstate NOx cap and trade programme or state-based NOx legislation of whatever type the state chooses (USEPA 2002a; 2005: 1).

Europe

Emissions trading has been used far less in Europe, particularly with respect to NOx. A UK scheme in the early 1990s for SO2 failed to generate much trade. The Slovak Republic has a trading scheme for SO2 from large industrial sources, including power plants. A trading scheme for NOx began in 2005 in the Netherlands. Elsewhere these gases are covered by standards and regulations. The United Kingdom is considering a cap and trade scheme to control SO2 and NOx from large industrial sources such as iron and steel works and oil refineries. The power industry, however, seems uninterested in such a scheme because local opposition would prevent its buying up emissions allowances (Keats 2005: 20-1).

Open market emissions trading

Open market emissions trading began in the early 1990s in various states in the USA. It allows companies to earn emission reduction credits (or discrete emission reductions) for voluntary reductions in a particular time period of specified air pollutants discharged from their plants - usually nitrous oxides and volatile organic compounds that contribute to smog. These can be either reductions from the usual emission rates for a particular facility, or reductions below the regulated standards which the facility is required to meet, whichever is the lesser. Reductions are often expressed in terms of concentrations of pollutants or rates of discharge per hour rather than total quantities of emissions discharged over a year. These programmes may also be referred to as 'rate-based trading' (USEPA 2002b: 2). Table 9.1 shows how emission reduction credits differ from emission allowances.

Table 9.1 Allowances vs credits

Emission reduction credit Emission allowance

Scheme: ‘Open market emissions trading'

Only emission reductions can be traded

Credits are generated when a source reduces its emissions below an agreed baseline Participation in the credit market is voluntary - sources can just meet existing standards

Applies to emission reductions below defined baseline

Scheme: ‘Cap and trade'

All emissions can be traded

Allowances are allocated by the regulatory authority

Participation in the program is mandatory - the overall emission cap still applies even if sources do not trade

Applies to all emissions

Source (Sorrell and Skea 1999: 11)

Firms that reduce the rate of emissions from a particular facility can sell the credits they earn to other firms which are not otherwise able to comply with emission regulations, or for whom buying credits is cheaper than reducing emissions to comply with the regulations.

Some open market emission trading schemes allow firms to gain credits from reducing pollution from a variety of small mobile sources such as old cars, leaf-blowers and lawnmowers. Credits can be exchanged between different types of sources and industries, and in some cases different types of pollutants are covered under the one scheme so that reductions in emissions of one chemical can be used as credits for increased emissions of another.

The trade is done through an Emission Trading Registry, which acts like a clearing house. These registries do not usually check whether the emission reduction credit is valid or legitimate, however - it is up to the buyer to do that (Leonardo Academy 2005).

The 'creator' or 'generator' demonstrates that they have exceeded their regulatory requirements and that the reductions are 'surplus'. They describe the steps they have taken or technology they have installed to reduce their emissions to show they are 'real' and the result of an emission reduction activity. They document their emis­sions before installing the technology, document their emissions after the technology is installed, and, using accepted engineering practices, 'quantify' the emissions in a workable and replicable manner. They must also show the reductions are 'permanent' for the life of the emis­sion reduction program. (Clean Air Action Corporation 2002: 13)

The US EPA developed a model for this type of trading, the Open Trading Market Rule, which was adopted in 2001 when it was incorpo­rated into the EPA's Economic Incentive Program (Clean Air Action Corporation 2002: 24).

Tradeable water pollution rights

Tradeable pollution rights can also be applied to water. This is mainly done in the USA and Australia, and often applied only to nutrient loads (nitrogen and phosphorus) in discharges to water. Nutrient trading is being considered for the Danube Basin in preparation for an increase in industrial activity in the countries of Eastern Europe as their economies grow (Hawn 2005b). The OECD (cited in Robinson amp; Ryan 2002: 24) has suggested that water trading markets are neces­sarily limited because of:

• transaction costs (that is, costs of administering a tradeable rights system)

• being limited to one catchment or river system

• being limited to trades with users downstream

• the importance of time and place of allocations or discharges.

In the USA, where some 40 per cent of waterways are in poor condition (Faeth 2000: 1), a national Water Quality Trading Policy was introduced in 2003. The US EPA encourages water trading to achieve reductions in nutrients and sediment (USEPA 2004b). Nutrients can create dead zones in waterways where algal blooms block the light, oxygen is used up, and fish and other aquatic or marine life cannot survive. The trading of nutrient credits generally involves factories or industries, with large individual dischargers paying for nutrient reduction credits from several smaller sources, usually farmers in the same watershed. Farmers can reduce the nutrient run-off from their land relatively cheaply by changing their tilling, planting or fertilising methods, while factories can find it quite expensive (Hawn 2005b; Sokulsky 2005).

Such schemes have already been introduced into a number of states with the aim of meeting water quality standards for least overall cost. Many states have a limit or total maximum daily load (TMDL) for indus­trial point sources discharging into waterways. Trades can be facilitated by a central body that acts as a pollutant exchange or broker, and some­times buyers and sellers do deals with each other directly, with the approval of the regulatory authority. Normally trade is confined to a par­ticular waterway or watershed and each trade includes a bit extra for the environment.

The EPA is open to the idea of trading to reduce some pollutants such as selenium, which comes from agriculture, but is opposed to trading in 'persistent bioaccumulative toxic pollutants' (USEPA 2004b).

Water pollution bubbles

The US EPA (1996) has also been supportive of water pollution bubbles or 'intra-plant' trading, where a company has a total discharge limit for all its outfalls but is able to decide how much each individual outfall dis­charges. This concept has also been adopted by the NSW EPA in Australia. For example, the South Creek Bubble Licence sets a maximum aggregate load for nutrients from several of Sydney Water Corporation's treatment plants discharging into South Creek, which flows into the Hawkesbury-Nepean river system - a system significantly stressed by nutrient loads. Sydney Water can decide how much of that aggregate load will come from each plant (James 1997).