More Clean Air For The Buck: Lessons From The U.S. Acid Rain Emissions Trading Program

The state-by-state representation of net sales and acquisitions (Figure 5) appear to suggest that, as predicted by EDF at the time it proposed the use of SO2 emissions trading, the highest-emitting states/sources are achieving the greatest overcontrol. Figure 5 reinforces the view that the financial incentive created by the opportunity to carry into the future unused allowances, and the extra emissions reductions they represent, is prompting widespread direct and indirect investment in overcontrol of SO2 emissions.

As predicted by EDF
at the time it
proposed the use of
SO2 emissions
trading, the highest-
emitting states
/sources are

achieving the greatest
overcontrol.

Figures 6, 7, and 8 distill and represent, in the form of both bar graphs and geography, power plant SO2 emissions in the 24 Phase I states as well as the ratio of such emissions to the total number of allowances held by the power plants in each state.

7

More Clean Air For The Buck: Lessons From The U.S. Acid Rain Emissions Trading Program

8

More Clean Air For The Buck: Lessons From The U.S. Acid Rain Emissions Trading Program Superimposing Figures 6, 7, and 8 on the wind patterns shown in Figure 1 shows just how important the extra SO2 emissions reductions are in removing SO2 from the atmospheric transport system.

[T]he best way to spur innovation is to create competition among that markets...that can help industry meet environmental targets...[T]he SO2 program put them into direct competition for meeting the needs of utilities and their customers.

The major benefit of the SO2 program thus stems not from allowance trading,
but from a structural reform in environmental legislation that removes govemment
from direct involvement in the decision of business. At the same time, the SO2
program firmly reinforces the role of government in determining and enforcing social
goals about the desirable level of environmental quality.

- Dallas Burtraw, Fellow at Resources For the Future,
Washington Post Commentary, March 31, 1996

Part III - Economic Performance

General economic performance during the years 1995 and 1996 was excellent throughout the United States. Notwithstanding the investment in the reduction and overcontrol of SO2 emissions, overall U.S. electric power generation continued to increase during the first two years of the program, as did electricity generation in the regions specifically affected by the requirements of the SO2 program in these two years - a result that flatly refutes the claims made by opponents of acid rain legislation throughout the 1980's. Figure 9 Indicates that total electricity generation in the United States increased over the period 1985 to 1996.

More Clean Air For The Buck: Lessons From The U.S. Acid Rain Emissions Trading Program

Figure 10 indicates the regional breakdown of
electricity generation in 1995 and 1996. It is
important to note that specific provisions of the
acid rain allowance trading program prevent Phase
I power plants from simply appearing to achieve
SO2 emissions reductions as a result of shifting
generation to non-Phase I plants. As a result, the
expedient of generation-shifting that avoids the
achievement of real emissions reductions cannot
explain the continued growth of generation while
SO2 reductions are being achieved.

Provisions of the acid
rain allowance trading
program prevent Phase I
power plants from
simply appearing to
achieve SO2 emissions
reductions as a result of
shifting generation.

10

More Clean Air For The Buck: Lessons From The U.S. Acid Rain Emissions Trading Program

11

As the following quote indicates, coal use also continued to rise even during the first two years of the program.

The electric power industry consumed a record 814.4 metric tons of coal, up by 5.6% from 1995. The robust growth in coal use for electricity generation was attributable primarily to:

•Significant growth in electricity usage due to strong economic growth and colder-than-normal weather in the early part of the year.

•Substantially reduced levels of gas-fired electricity generation caused by higher natural gas prices. •Negligible growth in nuclear-powered generation.

Source: "Annual Review 1996: Coal," Mining Engineering, Vol. 49, No.5, pp. 43-50, May 1997.

See "Emissions Trading: Practical Lessons From Experience," full reference can be found in the back