U.S. Energy Information Administration
February 1, 2010
What is a cap-and-trade program and how does it work?
A cap-and-trade program is designed to reduce emissions of a pollutant by placing a limit (or cap) on the total amount of emissions. The cap is implemented through a system of allowances that can be traded to minimize costs to affected sources. Cap-and-trade programs for greenhouse gas emissions would increase the costs of using fossil fuels.
A cap-and-trade program is different from an emissions tax. An emissions tax is a fee on each unit of emissions released. A tax sets a price on emissions, which provides an incentive for emissions reduction, but allows the actual amount of reduction that occurs to vary.
A cap-and-trade program sets the quantity of emissions, letting the price of allowances be set in the marketplace. However, both programs ultimately place a value on emissions and provide incentives for emission reductions.
What Is a Cap-and-Trade Program?
A cap-and-trade program is an environmental policy tool designed to reduce emissions of a pollutant by placing a limit (or cap) on the total amount of emissions that can be released by sources covered by the program during a fixed time period.
The overall cap on emissions is implemented through a system of allowances. Each allowance represents the right to emit a specific amount of emissions, and each emissions source covered by the program must submit enough allowances to cover its actual emissions. These allowances, sometimes called permits, are initially allocated to affected sources or auctioned off by the agency implementing the program.
Allowances can be traded, which creates an incentive for those who can reduce emissions most cheaply to sell their allowances to those who face higher emission reduction costs. The incentive to trade allowances persists as long as one or more sources can reduce emissions by an additional unit at a lower cost than some other source faces to achieve its last unit of emissions reduction. Therefore, allowances will be traded until the marginal cost of emission reduction is equal across all covered sources. At this point, the pollution level required by the cap is achieved – theoretically at the lowest possible cost to society – regardless of how the allowances were initially allocated.
How Does a Cap-and-Trade Program Work?
Not all cap-and-trade programs are identical. Below is a list of four characteristics shared by all cap-and-trade programs, with some possible variations shown. These variations could affect how a particular program works.
1. A limit or cap on emissions of a pollutant is established.
Who is required to limit their emissions. Is it all sources of emissions or just some sources of emissions?
What area the cap covers. Is it a region or State, the whole United States, or a group of nations?
When emission limits take effect. Will the cap be in place in the near term or at a later date?
Whether the cap will become tighter, meaning the total allowable level of emissions drops over time. If so, how quickly will this decrease happen?
When the cap is in place. Will it be in effect for a season – such as just for the summer months – or is it applied for the whole year?
2. An allowance must be surrendered for every unit (often a ton) of emissions generated.
Who must submit allowances. While this depends on the specific cap-and-trade program, some examples include producers of the polluting substance, distributors of a product whose production or consumption generates emissions, States, or even nations.
How allowances are initially distributed. Allowances could be auctioned, distributed for free based on current or historical emissions, or given out using some combination of an auction and a free distribution. In an auction, allowances are sold to the highest bidders. Uses of auction revenue depend on the specific cap-and-trade program, and could include the distribution of a portion of the revenue to consumers.
Whether the program allows for the purchase of offsets in lieu of allowances. Offsets are certified reductions in emissions from sources that are not required by the cap-and-trade program to restrict their emissions.
3. Allowances can be traded.
Here’s an example of how the trade could work. Emitter ABC found it really easy and cheap to reduce its emissions below the level covered by its allowances, while Emitter XYZ had a tougher time. ABC was able to make larger reductions in its emissions and offered to sell its extra allowances to XYZ. This transaction was a good deal for XYZ because the cost of allowances it bought was lower than the cost of equipment needed to reduce its own emissions to a level that matched the number of allowances it held before buying more allowances from ABC.
How much an allowance costs. In general, the allowance price depends on the options available to reduce emissions and the demand for allowances. If there are relatively low-cost options to reduce emissions, the price of allowances would be lower.
Whether emitters are allowed to save – or “bank” – allowances, either for their own future use or to sell to someone else later. Some proposals might also allow the current use of a future period’s allowances.
4. Actual emissions are measured and penalties are assessed if targets are missed.
Depending on the program, these tasks could be the responsibility of one or more governmental agencies.
How Do Cap-and-Trade Programs Affect Our Use of Energy?
The burning of fossil fuels, including coal, oil, and natural gas, is the main source of carbon dioxide – the most important greenhouse gas produced by human activity – and a major source of other emissions. A cap-and-trade program for greenhouse gas emissions would increase the cost of using fossil fuels, making them less competitive with non-fossil energy resources and increasing the overall cost of energy to consumers. The cost of using coal, which has the highest carbon dioxide content and the lowest price per unit of energy among the fossil fuels, would be most affected by a cap-and-trade program for greenhouse gases.
Why Might a Cap-and-Trade Program Be Considered?
A cap-and-trade program allows emitters to have flexibility in their approach to reducing emissions. An alternative environmental policy might require each regulated source to use a specific emission control technology. With a cap-and-trade program, the overall cap on emissions is fixed, but the compliance approach by any individual source need not be specified. This flexibility allows parties to choose the least costly option and should reduce the cost of reaching the overall emissions cap.
The implementation of the U.S. cap-and-trade program for sulfur dioxide beginning in 1995 is an example of the benefits of flexibility in reducing environmental compliance costs in the energy sector. Allowances for sulfur dioxide emissions were actively traded as coal-fired electricity generating units covered by the program chose a variety of compliance strategies. These strategies included installing scrubbers, switching to lower sulfur coal, and buying allowances.
Where Has Cap-and-Trade Been Used?
Cap-and-trade programs have been used to limit several different types of emissions in State, U.S., and international contexts.
As noted above, a cap-and-trade program limiting sulfur dioxide emissions has been operating in the United States since 1995. The European Union established its Emissions Trading System for greenhouse gas emissions in 2005. In 2009, the Regional Greenhouse Gas Initiative established an interstate cap-and-trade system for greenhouse gas emissions covering electric power plants in 10 northeastern States. Recently, there has been a lot of discussion about the Federal Government establishing a nationwide cap-and-trade program for greenhouse gas emissions.Read Full Post | Make a Comment ( 2 so far )
EPA to Propose Regulating Greenhouse Gas Emissions
By Juliet Eilperin
The Washington Post
April 17, 2009
The Environmental Protection Agency today plans to propose regulating greenhouse gas emissions on the grounds that these pollutants pose a danger to the public’s health and welfare, according to several sources who asked not to be identified.
The move, coming almost exactly two years after the Supreme Court ordered the agency to examine whether emissions linked to climate change should be curbed under the Clean Air Act, would mark a major shift in the federal government’s approach to global warming.
Former President George W. Bush and his deputies opposed putting mandatory limits on carbon dioxide and other greenhouse gases for years on the grounds that it would harm the economy; Congress is considering legislation that would do so but it remains unclear whether it can pass the proposal and enact it into law in the near future.
Late last month EPA sent the White House a formal finding that greenhouse gases endanger public health and welfare; the Office of Management and Budget signed off on the determination Monday.
When reached this morning, EPA spokesman Allyn Brooks-LaSure declined to comment on the matter.
President Obama pledged to limit greenhouse gases as a candidate, but has urged Congress to send him a bill that would cap them and allow emitters to trade pollution allowances nationwide. EPA administrator Lisa P. Jackson, in a speech at the Aspen Environment Forum last month, emphasized that the administration still hopes the country will develop a legislative answer to the question of how best to limit greenhouse gases.
“The best solution, and I believe this in my heart, is to work with Congress to form and pass comprehensive legislation to deal with climate change,” Jackson said. ” We hope to avert a regulatory thicket where governments and businesses spend an inordinate amount of time fighting. We are not looking for a doomsday solution.”
Some business groups, such as the U.S. Chamber of Commerce, have warned that if the federal government regulates carbon dioxide under the Clean Air Act it will end up imposing an enormous regulatory burden on small operations such as individual stores and even some office buildings.
EPA must hold a public comment period before finalizing its finding, and it would then have to look at regulating individual sectors of the economy, such as motor vehicles and power plants. Those two sectors account for roughly half of the nation’s carbon dioxide emissions.
In a teleconference with reporters this week David Doniger, policy director for the Natural Resources Defense Council’s climate center, said he did not think the agency would target small emitters of greenhouse gases if it began regulating emissions under the nearly 40-year old Clean Air Act.
“That is just not true,” said Doniger. “EPA is able to focus on the big stuff, the big sources of global warming pollution.”
Even before the formal announcement, experts predicted the decision would transform the federal government’s role in regulating commercial operations across the country. Roger Martella, who served as EPA’s general counsel under Bush and is now a partner at the firm Sidley Austin in Washington, issued a statement saying, “The proposed endangerment finding marks the official beginning of an era of controlling carbon in the United States.”
“This means that EPA’s mission of environmental protection will burst outside those bounds and place it on the stage as one of the most influential regulators of both energy use and the greater economy in the upcoming year,” Martella added. “The proposal, once finalized, will give EPA far more responsibility than addressing climate change. It effectively will assign EPA broad authority over the use and control of energy, in turn authorizing it to regulate virtually every sector of the economy.”
Many opponents of regulating carbon dioxide will now turn their attention to Congress, hoping to achieve a more modest cap on greenhouse gases through the legislative process than one that could be imposed by the federal government.
Fred Singer, who heads the Arlington, Va.-based Science and Environmental Policy Project and has repeatedly questioned the idea that humans contribute to climate change, said in a statement that the EPA proposal “is based on shoddy science and would impose a huge economic burden on American households . . . Congress must stop this unwarranted action by means of legislation, but without committing the same errors as EPA.”
Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita. Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol. Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program. Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector. On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline. Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.Read Full Post | Make a Comment ( None so far )