Emissions Trading, An Exercise in Reforming Pollution Policy

By T. H. Tietenberg | Go to book overview
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prior to the inception of the emissions trading program. Since it was powerless to alter those decisions or even to lower the resulting costs, the emissions trading program reduced costs by less than would have been possible if the program had started with a clean slate.
A particularly unfortunate side effect of overlaying emissions trading on a preexisting command-and-control allocation arises when some sources comply with the initial regulations rather rapidly and others resist. Because the emissions trading option appears late in the game, sources having already installed control equipment are precluded from using the program to their greatest advantage, while those who were able to fend off early expensive standards can reach compliance at a substantially lower cost. In this way the introduction of an emissions trading program rewards recalcitrant sources, which many potential supporters view as patently unfair.
In many geographic areas, by ignoring source location in allocating the control responsibility, the command-and-control policy reduced emission loadings more than necessary to meet the air quality standards. Due to the bias in the current program against trades that increase emissions (even if they improve air quality at the most polluted monitors), this initial overcontrol has persisted in the current program, lowering the actual cost savings.
Because emissions trading played no role in the command-and- control policy, control authorities have been slow in creating a completely congenial environment for trades. Some categories of trades (such as interplant trades) have been made inordinately difficult. This attitude has caused fewer transactions and thinner markets than desirable or possible.
Seeking to protect existing jobs while making transition as smooth as possible, the EPA implemented a grandfathered version of a marketable emissions permit system that has perpetuated a previously existing bias against new sources. Under this policy, new sources not only face more stringent control responsibilities than existing sources, but they have to acquire sufficient emission reduction credits to offset any emissions remaining after the control is applied. By raising the costs of new plants in relation to existing plants, this bias delays the replacement of high-polluting facilities and has blunted the introduction of those innovative control technologies which are embodied in new sources.
By using the command-and-control allocations as a point of departure for emission trades, the emissions trading program inherited a significant weakness of that system--an inadequate air quality accounting system. As a practical matter, this deficiency has made states more

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