CAP AND TRADE : AN OVERVIEW
Cap and trade is an interesting concept about controlling emissions in the environment. Emissions could be any environmental pollutant, however carbon dioxide was able to get more attention, as being a key in climate change and also being emitted in the environment in largest amounts. This blog is about a brief introduction to carbon cap and trade and its impact on the environment.
“Cap” refers to limits on carbon emissions in the environment from the industries. It is rightly referred as “right to pollute”. Each year government sets limits to the amount of carbon dioxide emitted in the environment measured in billion tons of carbon dioxide per year. Credits or allowances are assigned to the polluting companies as one credit per ton of carbon dioxide. Other greenhouse gases, such as methane or nitrous oxide, are included in the cap. Allowances for these gases are calculated in CO2 equivalents. For example, methane has 25 times the heat trapping potential of CO2, so 1/25 of a ton of methane emissions is equivalent to 1 ton of CO2. This is the “cap” or limit for carbon emission for that company. Each year cap on carbon gets to successively lower limits.
Here is an interesting word “trade”. Once credits are allocated to the companies and the caps are set for carbon dioxide emissions, a company could use up all the credits that are assigned for carbon pollution, or stay under the cap and sell the unused credits to other polluters companies that have exceeded their emission credits. This approach helps as different industries have variable scope in controlling emissions.
In the past, cap and trade policy had been implemented for curbing sulfur dioxide, which was pouring out through the coal fired power plants. Sulfur dioxide has serious health impacts. Under Clean Air Act 1990, EPA implemented cap and trade and results were encouraging. By 2006, the program had reduced power sector SO2 emissions to 40 percent below 1990 emission levels, at just one-fourth of projected costs. In 2010, the annual health benefits from the program are predicted to total more than $119 billion, not including the value of reduced acid content in lakes and streams.
Although implemented successfully to curtail sulfur dioxide emissions, the US policy-makers seem cautious to implement similar policies for green-house gas emissions. In Europe however this policy has been implemented since 2005 under Emission trading Scheme (ETS). EU ETS achieved the target of reducing carbon emissions in the atmosphere, however it has always been a wobbly ride. In the time frame of 2005-2009 of EU ETS carbon emission have reduced by 15% as compared to 9% in US during same time frame, where the carbon cap is absent. Presently EU ETS is running in its third phase and the cap has reduced by 21%. However ETS in EU began with some policy error which need to be corrected recently. ETS allotted too many allowances in the initial phase, as a result price of carbon collapsed (~€20/ton to ~€5/ton), as a result ETS has to curb the allowances in the second and third phase. Recently European Commission designed a plan to take 900 m tons of carbon allowance off the market and reintroduce them later hoping demand would get better. This plan has been rejected by European Parliament, nevertheless back-loading as this entire issue is termed as is not over yet and will be discussed in the future.
In a small time frame Cap and Trade has become popular worldwide as countries like Australia, South Korea, and several Chinese provinces are planning to implement it. In the US cap and trade is implemented regionally by states like California, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. Except for California, States mentioned above are part of Regional Green House Gas Initiative (RGGI) and have noticed a drastic reduction in greenhouse gas emissions (from 188 million tons of carbon-dioxide in 2005 to 91 million tons in 2012). Emitting greenhouse gases in the atmosphere is not a local episode, however it has strong global consequences. Hence it is important for developing and developed countries all over the world to come together and participate to create a policy that will benefit not only the environment but also our coming generations.