Mechanics of an Emissions Trading Scheme Regulator ensures compliance but does not fix emissions for each source 

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Context 1

... introduction of this Trading Pilot Scheme can serve as a model for future environmental regulation in India and also position industry to benefit from potential tie-ups to global emissions trading schemes, as for carbon dioxide. Introducing emissions trading would make India a clear leader in environmental regulation amongst emerging economies. Market-based schemes lower compliance cost and provide a powerful, flexible tool to respond to a wide range of pollution problems. A successful cap-and-trade system will have the additional benefit of allowing India to easily receive payments for the contribution of its environmental regulations to reducing greenhouse-gas emissions. The rationale for emissions trading is always the same—reducing the cost of reaching some targeted level of pollution. Societies usually care not who emits pollutants but only about the total of their emissions. By fixing this total and allowing trade between different firms for the right to pollute a certain share, cap-and-trade schemes allow firms with cheaper ways to reduce emissions to achieve more of the overall reductions. This trade therefore lowers the overall cost of meeting the pollution target. Put bluntly, it streamlines regulation and saves firms money while also protecting the environment. The application of cap-and-trade pollution markets has been very successful in practice, achieving the desired reductions in emissions reliably and at lower-than-expected cost. This section briefly considers three different emissions trading schemes for three different air pollutants that have been implemented in different countries. The purpose of the discussion is to bring out the important aspects of the design and implementation of each scheme to provide some background for the issues discussed in section I. Purpose. The 1990 Clean Air Act Amendments established the first large-scale system to reduce pollution through tradable emissions permits. (Schmalensee et al., 1998) The purpose of the program was to reduce emissions of SO 2 from power plants to stop acid rain and for this reason it is also sometimes known as the Acid Rain program. The overall goal of the program was a reduction in annual SO 2 emissions by 10 million tons below 1980 levels. Emissions Cap. The emissions cap in this program was set at about half of the level of emissions from the same set of power plants in 1980, beginning in 1995. Phase I subjected only the 263 dirtiest power plants in 21 states to the cap and Phase II, beginning in the year 2000, applied to over 2,000 fossil-fuel burning electric generating units, virtually all such units in the United States. Each participating unit is required to hold an amount of permits, or allowances, at least equal to its annual emissions. If a plant emits 5,000 tons of SO 2 , it must hold 5,000 permits to do so. Regardless of the number of permits a plant holds, it may not exceed upper limits set by the same act to protect public health. (Environment Protection Agency, 2009a) The overall level of emissions was set on a per-unit basis based on baseline heat input of the electricity-generating units. Permits were allocated for each year beginning in 1995. The EPA allocated allowances at an emission rate of 2.5 pounds of SO 2 /mmBtu (million British thermal units) of heat input, multiplied by the unit's baseline mmBtu (the average fossil fuel consumed from 1985 through 1987). Implementation . Existing generating units were given, free, a number of permits based on the formula above at the beginning of the program. Note that the determination of the cap and the allocation of the units are in principle separate; the EPA could have set the overall cap using the formula above but then allocated permits using an auction. Trading . After the initial allocation, new units or units needing additional permits could obtain them from two sources: purchasing from other or at auctions run by the EPA. The purpose of the auctions was to provide clear information about prices, but in practice most trading occurred privately. Trading enables units to achieve emissions reductions at low cost without changing the overall level of pollution set by the cap. Figure 2 compares the sulfur dioxide emissions rates for each polluting source under the trading scheme, as shown by the vertical gray bars, to the emissions rates likely for each unit without trading, as shown by the heavy black line. Many units have actual emissions rates higher or lower than they would have been under a fixed emissions standard, indicating that units used the flexibility of emissions trading to achieve compliance at a low cost. For some units, the best way to comply is to reduce emissions directly, for others it is to pay for the right to emit more by buying credits from units that were able to abate emissions at a lower cost. The price of emissions urged each unit to seek out low-cost means of abatement while the cap ensured that overall emissions fell, as Figure 1 showed above. Monitoring. Emissions are monitored continuously at affected units, at an average annual cost of $124,000. Continuous emissions monitoring is an essential foundation for trading, which requires that every ton of unit emissions be recorded. Units required to monitor SO 2 emissions in pounds per hour must use both an SO 2 pollutant concentration monitor and a volumetric flow monitor. Both concentration and flow are required because the permit applies to the total mass of the pollutant emitted. In addition to this basic equipment the unit must have a data acquisition and handling system (DAHS) to process and record readings. The monitoring protocol includes conservative formulas for filling-in missing data that penalize units for monitoring downtime. The EPA also has monitoring protocols for NO and CO emissions. The number of permits held by each unit is tracked in an Allowance Management System (AMS). Parties may trade permits privately but must notify the EPA when permits acquired through these trades are going to be used to cover emissions. Affected units must deliver to the EPA valid permits sufficient to cover a year’s emissions by 1 March of the year following. If a unit does not have enough permits it must surrender any permits for the following year as excess emission offsets and pay a penalty for the present year’s excess. (Federal Register, 1997) The penalty is the number of excess tons emitted times a base fine of $2,000 per ton, an excess charge that is adjusted annually for inflation. The excess charge for 1997 was $2,525 per ton. As permit prices in this year were little above $100 per ton the excess charge is enormous and in practice all units complied by holding sufficient permits. Outcomes. The effect of the program was a large reduction in emissions at a lower cost than anticipated. In 1995, the first year of the program, total emissions fell from 8 million tons to less than 5 million tons. Generating units achieved these reductions by using lower-sulfur coal and by using scrubbers to remove SO 2 from stack gases. The estimated savings to firms from using a trading scheme instead of fixed regulations was around $225 million to $374 million per year. (Ellerman et al., 1997) Purpose. The Emissions Offsets Trading Program was introduced in 1992 to reduce airborne particulate emissions from stationary industrial sources in Santiago, Chile. (Montero and Sanchez, 2002) Standards for particulate matter less than 10 nanometers in diameter (PM10) had been consistently exceeded in Santiago since the 1970s and these high levels have been related to mortality and respiratory disease. (Ostro et al., 1999) Emissions Cap. At the time the regulation was issued existing sources received daily emissions rights in proportion to a pre-determined baseline emissions rate that was uniform across existing sources. The Program aimed to reduce emissions by 80%, a figure chosen to achieve daily ambient air-quality standards 95% of the time. The cap applied to sources with 3 a flow rate greater than 1,000 m per hour, of which there were a total of 680 in 1993. Both existing and new sources are subject to a maximum cap that cannot be exceeded regardless of the number of permits held by that source. This overall cap was usually about twice the level of emissions permits granted a source. In addition, large stationary sources were liable to be shut down during episodes of severe ambient air quality, again regardless of the number of permits held. Implementation. Existing sources were granted emissions permits free and in perpetuity, or “grandfathered” in. Any new sources arising after the program began were obligated to purchase rights from existing sources. This difference made the introduction of the program very successful in getting existing but unknown point sources to identify themselves in order to secure emissions rights. Because unknown sources emerged to secure rights, however, and rights were based on a per-unit emissions capacity formula, the overall cap ended up less stringent than expected. Trading. Rights to emit are based on annual reviews of capacity. Therefore the only requirement is that at the time of ...

Context 2

... Figure 2 shows the place of these key components within the overall structure of an emissions trading scheme. The figure shows how emissions trading changes the role of the regulator. Rather than fixing emissions at the level of the individual polluting unit, the regulator sets an amount of overall emissions, which are what matter for environmental quality, and allocates these emissions amongst units in the form of permits. Units can then trade this right to emit. Trading does not change the overall cap but allows the required emissions reductions to be achieved by those units that can cut emissions at the lowest cost. At the end of each permit period the regulator checks emissions against permit holdings to verify compliance. The introduction of emissions trading would position India as a clear leader in environmental regulation amongst emerging economies. The benefits of a trading scheme will extend beyond the immediate goal of achieving compliance at a lower cost to society. Having a trading scheme in place will make it easier to adjust regulation as environmental goals change. Tighter environmental standards can be achieved with a drop in the level of the cap, which would raise the price of emissions permits and give incentives to pollute less, rather than abruptly throwing certain areas or sources out of compliance. India may also benefit by tying the system for local emissions trading to global emissions trading schemes for carbon dioxide. A successful cap-and-trade system will establish the infrastructure needed for putting a price on carbon dioxide as well as local pollutants, positioning the country to easily receive payments for the contribution of its innovative regulations to reducing greenhouse-gas emissions. The European Union Emissions Trading Scheme, Kyoto protocol and future carbon mitigation policies outlined under the Copenhagen Accord will generate demand for such reductions. An emissions trading system to meet this demand would generate a net flow of foreign investment and reward the Indian economy for growing along a green path. The next section, Section II, on the Key Components of an Emissions Trading Scheme, discusses the areas introduced in Figure 2 in greater detail, to show what decisions affect the design of a trading scheme and to guide these decisions in the Indian context. Section III presents the next steps needed to move from a concept note to a workable plan for implementation of emissions trading. Section IV presents some relevant cross-country experience with emissions trading to place the discussion and recommendations from prior sections in the rich context of lessons from existing schemes. This section relates past emissions trading-programs, which are reviewed in section IV, to the pre-requisites for implementing local trading for air pollutants in Indian states. In each subsection, indicated by capital letters, bold-faced headings indicate a point of action where MoEF and participating SPCBs need to set a priority or make a decision. The background information regarding each decision is provided below these ...

Context 3

... Figure 2 shows the place of these key components within the overall structure of an emissions trading scheme. The figure shows how emissions trading changes the role of the regulator. Rather than fixing emissions at the level of the individual polluting unit, the regulator sets an amount of overall emissions, which are what matter for environmental quality, and allocates these emissions amongst units in the form of permits. Units can then trade this right to emit. Trading does not change the overall cap but allows the required emissions reductions to be achieved by those units that can cut emissions at the lowest cost. At the end of each permit period the regulator checks emissions against permit holdings to verify compliance. The introduction of emissions trading would position India as a clear leader in environmental regulation amongst emerging economies. The benefits of a trading scheme will extend beyond the immediate goal of achieving compliance at a lower cost to society. Having a trading scheme in place will make it easier to adjust regulation as environmental goals change. Tighter environmental standards can be achieved with a drop in the level of the cap, which would raise the price of emissions permits and give incentives to pollute less, rather than abruptly throwing certain areas or sources out of compliance. India may also benefit by tying the system for local emissions trading to global emissions trading schemes for carbon dioxide. A successful cap-and-trade system will establish the infrastructure needed for putting a price on carbon dioxide as well as local pollutants, positioning the country to easily receive payments for the contribution of its innovative regulations to reducing greenhouse-gas emissions. The European Union Emissions Trading Scheme, Kyoto protocol and future carbon mitigation policies outlined under the Copenhagen Accord will generate demand for such reductions. An emissions trading system to meet this demand would generate a net flow of foreign investment and reward the Indian economy for growing along a green path. The next section, Section II, on the Key Components of an Emissions Trading Scheme, discusses the areas introduced in Figure 2 in greater detail, to show what decisions affect the design of a trading scheme and to guide these decisions in the Indian context. Section III presents the next steps needed to move from a concept note to a workable plan for implementation of emissions trading. Section IV presents some relevant cross-country experience with emissions trading to place the discussion and recommendations from prior sections in the rich context of lessons from existing schemes. This section relates past emissions trading-programs, which are reviewed in section IV, to the pre-requisites for implementing local trading for air pollutants in Indian states. In each subsection, indicated by capital letters, bold-faced headings indicate a point of action where MoEF and participating SPCBs need to set a priority or make a decision. The background information regarding each decision is provided below these ...