Evaluation of Cap-and-Trade Approaches to Air Regulations

The advent of cap-and-trade systems over the past decade has provided an opportunity to achieve substantial reductions in emissions at a cost that appears to be substantially below that required in a traditional emission-control program. At the same time, these programs have met with varying success. Even in the case of the acid rain SO2 emissions-trading program, which has been the most successful application, there are issues to be addressed and improvements that could be made. The following identifies the major issues and opportunities for ensuring that cap-and-trade programs can be an effective and growing part of the AQM system.

Spatial Redistribution of Emissions

One of the major reservations expressed about cap-and-trade programs is that they may produce spatially and temporally heterogeneous patterns in emission reductions with undesirable environmental consequences. Although more conventional prescriptive approaches can address regional and seasonal issues by defining technology or performance standards that are more restrictive in areas where or, at times, when environmental problems are more critical, the least costly trading programs allow trading across regions and banking of emission allowances without regard to the possible environmental consequences. Such trading might worsen ecological hot spots or increase the number of persons exposed to pollution. That possibility is especially of concern for toxic air pollutants. Spatially heterogeneous emission reductions are also of concern for a pollutant like NOx, whose emissions can have little or no effect on O3 pollution in one region of the nation and a dominant effect in another. On the other hand, heterogeneous emission reductions are not of concern for nonreactive, long-lived gases, such as CO2 and methane (CH4).

Some analysts of cap and trade point out that there is little possibility that any given area will have negative impacts from the program, provided the cap is set low enough to reduce emissions by a large percentage (Burtraw and Mansur 1999). They also point out that emissions trading cannot be used to avoid meeting NAAQS (or other health and safety regulations) and that states retain the authority to set tighter emission limits to meet NAAQS. Both Massachusetts and Connecticut have adopted more stringent SO2 emission levels for electricity generators for that reason, and New York is in the process of developing them. These arguments appear to be largely borne out by the results of the acid rain SO2 emissions trading program, which set a stringent national emissions cap on a criteria pollutant. As illustrated in Figure 5-2, the acid rain emissions trading program has achieved SO2 emission reductions in each of five major multistate regions of the contiguous



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