MORE CLEAN AIR FOR THE BUCK: Executive Summary In 1990, then President George Bush and the U.S. Congress launched what many have described as the largest-ever "experiment" with the use of emissions trading for reducing and managing pollution. To reduce sulfur dioxide (SO2) emissions, the major precursor of "acid rain," the Clean Air Act Amendments of 1990 require all electric power plants to reduce and cap their SO2 emissions. At the same time, the program allows those power plants to trade any SO2 emissions reductions they make below their required SO2 "cap" or emissions limit. The first phase of the acid rain/SO2 trading program began in 1995 and has yielded two years -1995 and 1996 – of impressive environmental and economic results. Figure i summarizes the most dramatic ones: Not only have Phase I utilities reduced their SO2 emissions as much as the law requires, but they also have made more reductions than required in response to the incentives created by the SO2 emissions trading market. 1 This report was prepared by the following staff members in the Global and Regional Atmosphere Program at EDF: senior economist Daniel J. Dudek, senior attorney Joseph Goffman, science intern Deborah Salon, economic analyst Sarah Wade, and with the assistance of senior scientist Michael More Clean Air For The Buck - Executive Summary At the same time, the SO2 emissions trading market has done what markets do best: drive down costs. Largely through a series of graphs and illustrations, this report details these remarkable results in the hope of helping to inform three critical, ongoing policy debates: (1) how to manage the emissions of greenhouse gases (GHGs) both domestically and internationally (including the achievement of early GHG reductions, on which President Clinton focused in the climate change initiative he unveiled on October 22, 1997); (2) how to control pollutants, like oxides of nitrogen (NOx), whose long-range transport across the easter United States interferes with attainment of the health-based standard of the Clean Air Act for ground-level ozone; and (3) how to finish the job, apparently only just started by the current acid rain program, of protecting sensitive ecosystems from acid deposition. In each case, the use of emissions trading is at, or near, the focus of the debate. The U.S. EPA has recently proposed a new mandate under which 22 states would be required to implement reductions in NOx as a precursor of ozone. As part of this proposal, the EPA has promised to help the states develop emissions trading programs for NOx that could resemble the one that Congress created for SO2. The debate that has the greatest urgency at the moment, however, is the one set to culminate in December 1997 as the nations of the world convene in Kyoto, Japan, in hopes of adopting a protocol for the reduction of emissions of GHGs. Because the United States made international GHG emissions trading the centerpiece of its proposal, the entire international community has turned its attention to this innovative policy tool. With the challenges of combating the growth of GHG emissions and of curbing the transport of NOx emissions still to be met, this report lays out the following environmental and economic successes of the first two years of acid rain emissions trading: SO2 emissions have not only been reduced to required levels, but utilities have achieved greater than 35% more SO2 reductions than required. These extra reductions are distributed across the 24 states whose utilities had to make reductions during 1995 and 1996. The highest-emitting sources and/or states have tended to make the greatest number of extra reductions. The cost of SO2 reductions, as reflected in the trading price of extra SO2 reductions, or "allowances" as the Clean Air Act calls them, is far below predicted levels. Notwithstanding the rapid fall in SO2 emissions, both electricity generation and the U.S. economy as a whole were up during 1995 and 1996. Although the acid rain program is too new to sustain firm conclusions about the ecological effects of the SO2 reductions achieved, there is evidence that the emissions reductions have already reduced sulfate deposition in many areas. To be sure, changes in the coal industry, notably dramatic efficiency improvements in the mining and transportation of low-sulfur coal in the West, have done much to facilitate the utility industry's response to the new SO2 emissions limits. Nevertheless, the consistent overcontrol of SO2 emissions during 1995 and 1996 and the low cost of traded SO2 emissions allowances bear the distinct imprint of an emissions trading market. The robustness of the emissions reduction and the economic results of the acid rain program's first two years suggests that these results are precisely what would be expected of a program that, through the creation of More Clean Air For The Buck - Executive Summary For its first two years, at least, the acid rain emissions trading program has tumed in superior environmental performance at startlingly low cost. Such an outcome is essential if the United States and the global community are to solve other pressing air pollution problems like that posed by the continued rise of GHG emissions. MORE CLEAN AIR FOR THE BUCK: Part I - Introduction The U.S. experience with its acid rain emissions trading program has been strikingly positive. Throughout the 1970's both lay and scientific observers noted the occurrence of acidified lakes and streams across large areas of the eastern United States, many of which were devoid of animal life. Anecdotal and scientific evidence also pointed to declines in some forests in roughly the same areas. Dr. Gene Likens, the first scientist in the United States to identify the cause as related to air pollutants, coined the term “acid rain” to describe the phenomenon. In 1980 the National Academy of Sciences issued a report supporting the view that the emissions of sulfur dioxide (SO2) into the atmosphere resulted in acidic deposition (rain, snow, and fog) that, in turn, caused these environmental damages. The academy's report also suggested that a 50% reduction in total SO2 emissions would alleviate the problem of lake water acidification. The ensuing scientific debate about the link between air pollution, acid deposition, and adverse effects on ecosystems consumed the rest of the decade. It was fueled by the bitter political and economic controversy, among participants from different sections of the United States and different industries, over the total cost of reducing SO2 emissions and the perceived inequitable distribution of those costs and the claimed benefits. Specifically, the vast bulk of U.S. SO2 emissions were, and are, from coal-buming utilities in the Midwest and Southeast. These companies and regions would bear the cost of the reductions, as would that part of the coal industry that produced higher sulfur coal. Finally, in 1990, Congress enacted legislation that imposed a little less than 50% reduction on total U.S. utility SO2 emissions. The reduction is being implemented as an annual SO2 emissions budget for utilities. Each power plant is issued a fixed number of SO2 emissions allowances, which it may trade with any other power plant, provided that at the end of the year it holds emissions allowances in an amount equal to its emissions for that year. Allowances that are not used to cover emissions in one year may be saved for use in later years. Congress... imposed a The ability to trade and save unused allowances offers utilities a direct financial incentive to achieve more reductions in emissions than required, as well as the ability to find the lowest-cost means of achieving compliance. An additional environmental benefit is realized by 1 This report was prepared by the following staff members in the Global and Regional Atmosphere Program at EDF: senior economist Daniel J. Dudek, senior attorney Joseph Goffman, science intern Deborah Salon, economic analyst Sarah Wade, and with the assistance of senior scientist Michael |