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Capping Emissions: How Low Should We Go?

Investigating where environmental efficiency and good public policy intersect.
Fortnightly Magazine - December 2002

levels (5 tons). The total allocation of allowances for CO 2 emissions is capped at 1990 levels, or 2.05 billion tons. The bill allows for emissions trading and some degree of banking for all gases except mercury.

The most moderate of the three plans is the Bush administration's "Clear Skies" proposal, sponsored by Sen. Bob Smith (R-N.H.) as S.2815 and Rep. Joe Barton (R-Texas) as H.R.5266. This proposal caps annual emissions of SO 2 at 4.5 million tons in 2010 and three million tons in 2018; annual emissions of NO x at 2.1 million tons in 2008 and 1.7 million tons in 2018; and annual emissions of mercury at 26 tons in 2010 and 15 tons in 2018. It permits the trading of emission allowances for all three pollutants. The proposal does not include a cap on CO 2 emissions.

A compromise between these two, by Sen. Thomas Carper (D-Del.) (S.3135), was introduced in October 2002. The proposal caps annual emissions of SO 2 at 4.5 million tons in 2008, phasing down to 2.25 million tons in 2015; annual emissions of NO x at 1.87 million tons in 2008 and 1.7 million tons in 2012; and annual emissions of mercury at 24 tons in 2008 and between five and 16 tons in 2012. It also includes a cap of approximately 2.56 billion tons on CO 2 emissions in 2008, falling to roughly 2.39 billion tons in 2012. This proposal permits the trading of allowances for all four gases and includes trading with non-electricity sources of carbon.

While the caps on NO x and SO 2 proposed in the bills differ importantly from the specific efficient emission levels that we analyze in detail above, especially with regard to SO 2, all three bills propose caps that are within the range of efficient emission caps suggested by our analysis. The Jeffords and Carper bills ultimately limit SO 2 emissions to about 2.25 million tons, while Clear Skies sets an ultimate cap of three million tons, both of which lie within the efficient range of 0.9 million to 3.1 million tons identified in our analysis. Thus, the aggressive targets in these proposals appear to be well justified from the perspective of economic efficiency. Likewise, for NO x emissions, both the Jeffords target of 1.5 million tons and the Carper/Clear Skies target of 1.7 million tons are within the one million to 2.8 million ton range for efficient emission levels supported by current knowledge.

According to our forecasts, the level of SO 2 emissions that is most likely to be efficient would yield an allowance price of $3,500 per ton. The multi-pollutant bills all would yield allowance prices under $2,000 if the caps were implemented under a perfect trading system without additional regulations including mandatory caps on CO 2 or mercury. 5 The efficient level of NO x emissions yields an allowance price of $1,100 per ton, whereas the multi-pollutant bills all would yield allowance prices between $1,000 and $1,100 under the assumptions in our model. However, more important than our specific estimates is our