The Enforcement Challenge of Cap-and-Trade Regulation

By McAllister, Lesley K. | Environmental Law, Fall 2010 | Go to article overview

The Enforcement Challenge of Cap-and-Trade Regulation


McAllister, Lesley K., Environmental Law


I. INTRODUCTION

II. THE IMPERATIVE OF ACCURATE EMISSIONS DATA
   A. The Compliance Equation
   B. Market and Environmental Integrity
   C. Incentives for Fraud

III. OBTAINING ACCURATE EMISSIONS DATA
   A. Emission Monitoring Methods
      1. Direct Measurement
      2. Estimation Using Emissions Factors
   B. Self-Monitoring and Reporting
      1. Self-Monitoring and Reporting in Environmental Law
      2. Self-Monitoring and Reporting Rules in Cap-and-Trade: A
         Reprise of Best Available Technology
      3. Enforcement of Self-Monitoring and Reporting Rules
   C. The Additional Burdens of Verifying Offsets

IV. ENFORCEMENT THROUGH COOPERATIVE FEDERALISM
   A. Federal Role
   B. The Role of States
   C. Citizen Enforcement
   D. Third Party Verification

V. CONCLUSION

I. INTRODUCTION

Cap-and-trade regulatory programs present a significant enforcement challenge. To administer a cap-and-trade program, a regulatory agency needs a full accounting of the emissions from each regulated facility in the program. (1) Assembling such data is costly and resource intensive. In the Clean Air Act's (2) Title IV Acid Rain Program (Title IV)--the hallmark cap-and-trade program of the United States Environmental Protection Agency (EPA) to control sulfur dioxide (SO2) emissions from power plants--"measuring and monitoring have been the most complex and costly components" of the trading program. (3) The Los Angeles agency that administers the Regional Clean Air Incentives Market (RECLAIM), another longstanding cap-and-trade program, states that "an unanticipated consequence of RECLAIM was the enormous amount of resources it takes to adequately monitor and enforce compliance." (4)

Cap-and-trade regulation remains the likely instrument of choice for a national program in the United States to regulate the greenhouse gas emissions that cause climate change. (5) The cap-and-trade program set forth in the American Clean Energy and Security Act (ACES Act), (6) passed by the House of Representatives in June 2009, would have capped about 85% of all greenhouse gas emissions in the United States and applied to about 7500 entities. (7) Although the ACES Act did not become law due to Senate inaction, (8) a similarly comprehensive cap-and-trade system seems likely to be considered again in the future. (9)

This Article draws on the experience of past cap-and-trade programs to describe and analyze the enforcement challenges that will confront a future U.S. cap-and-trade program for greenhouse gases. (10) Part II of the Article describes why accurate emissions data are so critical to the functioning of a cap-and-trade program. Part III discusses how emissions data are obtained. Part IV argues that a comprehensive cap-and-trade program to reduce greenhouse gas emissions should not be enforced by the federal government alone. (11) Rather, a relatively decentralized cooperative federalism approach is called for. Significant roles should also be played by state enforcers, citizen enforcers, and possibly third party verification entities. (12)

II. THE IMPERATIVE OF ACCURATE EMISSIONS DATA

In a cap-and-trade program, accurate emissions data are essential to determining each regulated facility's compliance. Accurate emissions data also support the market value of the program's tradable allowances and create confidence in the program's attainment of its environmental objectives. Yet, at the same time, incentives for facilities to have their emissions undercounted clearly exist, particularly when allowance prices are high.

A. The Compliance Equation

A threshold question in determining whether cap-and-trade is a suitable regulatory approach is whether emissions can be monitored accurately. (13) To determine whether a regulated facility has complied, the agency must be able to ascertain that the facility has enough allowances to "cover" its emissions at the end of the compliance period. …

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