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Ready for CO2 Allowances? U.S. Passes on Emissions Cap, Kyoto or No

Fortnightly Magazine - May 15 1998

Program [for SO2], that you'll regulate at the boiler, but the acid rain model is not necessarily a great model for CO2. A lot of people gravitate to that model because we know how it works."

The Center has focused on one model that would target fuel producers rather than users. Under this model, fuel producers would have to go out and get allowances, he says. Users would see regulation reflected in prices.

This sort of "upstream regulation" would account for more than 80 percent of CO2 emissions since it would include transportation, industrial and residential users, instead of focusing solely on utilities, a tactic mirrored in other proposals (see Figure 2). The goal is to get beyond the utilities and look at all fuel use; all energy-related CO2, not just electricity, Hardgrave says.

An auction system likely would solve the second issue of how to allocate allowances, Hardgrave adds. Yet, for political reasons, such a system is unlikely to get adopted. It's more likely that allowances will be issued based on historic fuel-use records. Based on this usage information, a baseline would be created for a given company; if actual emissions were greater than the allocation, then a company would either have to purchase credits or reduce emissions.

"Our suggestion is, if you can picture this: Take whatever emissions are in 1998 for a company as a whole (em not looking just at a particular facility they want to report, but looking at where they need to be in 2007 (em and draw a line between those two points. If you're below the line, you get a credit. If you're above the line you don't have anything to sell."

Two issues are left to consider in awarding early reduction credits: whether credit should be project-based or budget-based. Project-based crediting would include many early attempts utilities are undertaking. This system could prove an "administrative nightmare" due to the difficulty in tracking offsets and carbon sinks, but would allow utilities greater flexibility in meeting targets. A budget-based system would prove much more limiting, but could provide greater certainty that emissions are actually being offset.

Monitoring sinks, for instance, is a real problem, according to David Harrison Jr., vice president of National Economic Research Associates Inc. "Suppose you give credits for someone planting trees; you don't know whether those trees are really substitutes for trees that would have been planted otherwise," he says.

NERA has put together a proposal for an international trading program. %n7%n

The danger of a CO2 program is if you don't develop an effective program, you run the risk of not creating benefits, Harrison says. For instance, an international program that does not include developing countries will prove neither effective nor cost-effective. "That's why it's so critical to develop some mechanism that will include those countries, if not initially, at least eventually."

According to NERA's report, while developed countries account for nearly half of current carbon emissions, that proportion is likely to change as developing countries, such as China, India and Brazil, progress (see Figure 4).

"These proposals are out