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Significant obstacles stand in the way of achieving cost savings that should accrue to market-based emissions trading policies.
Fortnightly Magazine - June 15 2003

old regulated mentality lingers.

In contrast, we have found our focus on minimizing near-term earnings impacts resonates well with many power companies in deregulated states. This has become increasingly true as the financial crisis has deepened. In the current market, the cost of borrowing for heavily leveraged companies to finance pollution control investments has become prohibitively expensive.

A further challenge to achieving the cost savings from emissions trading comes from the ongoing balkanization of the emissions trading markets resulting from individual states implementing their own restrictive emissions trading regulations. Emissions trading yields the most cost savings in large markets with a diverse population of affected units. But nine states have implemented their own multi-pollutant regulations, and other states are moving in the same direction, thus subdividing the large national and regional emission allowance markets that exist today-and as proposed in all of the multi-pollutant bills in Congress-into much smaller markets. Indeed, in some states like New York, the emissions regulations place restrictions on trading allowances to downwind states, or require importing two or three allowances to gain one ton of credit within the state. These state-based emission markets limit the cost savings that can accrue to larger regional and national markets.

In conclusion, the United States is at a critical juncture in terms of air emissions regulations. New multi-pollutant legislation has been proposed that could deliver a comprehensive, integrated, low-cost solution to the major air pollution problems facing the country. These proposals rely on emissions trading to achieve these air quality goals in a cost-effective efficient manner. However, there are several obstacles standing in the way of obtaining these emissions trading benefits.

Chief among these obstacles is the continued regulation of the power markets that favors capital-intensive air compliant strategies. There is a critical need for leadership from Washington to finalize national multi-pollutant legislation and prevent further balkanization of emissions markets, and for national electric market legislation that ensures that the cost savings from emissions trading.

  1. Wall Street Journal, May 1, 2003, p. A14.
  2. Environmental Data Services,
  3. Douglas R. Bohi, and Dallas Burtraw, "SO 2 Allowance Trading: How Experience and Expectations Measure Up," Resources for the Future, Discussion Paper 92-24, February, 1997.

Market-Based Pollution Regulation: A History

The EPA has relied on market-based approaches for achieving environmental objectives, dating back to the phase-out of leaded gasoline in the 1970s. The rationale for relying on market-based approaches for regulating pollution is that they will harness the efficiency of the market place to reduce the overall costs of achieving air quality goals. The first national foray into market-based air emission approaches was the SO 2 emissions cap and trade program, which was first established by the Clean Air Act Amendments of 1990. Resources for the Future has estimated that this market-based SO 2 allowance trading program has lowered the costs of addressing the U.S. acid rain problem by 43 percent relative to an enlightened command and control approach. 1 The EPA has also worked with states in the eastern United States to create the NO x SIP Call program, which began in May