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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

of this year.

As illustrated in Figure 1, allowance markets have a huge potential for growth. The current SO 2 and NO X allowance markets have a value conservatively estimated at $2.5 billion. 2 The Bush administration has proposed multi-pollutant legislation, the Clear Skies Act, which would further reduce SO 2 emissions, expand the current NO X emissions regulation from an eastern regional summer-only trading regime into a national annual program, and for the first time introduce an emissions trading program for mercury emissions from electric generation sources. Should Clear Skies be enacted, the emissions trading program in the United States would expand to a $10 billion dollar market.

A competing multi-pollutant proposal in Congress, sponsored by Sens. Thomas Carper, D-Del., Lincoln Chafee, R-R.I., John Breaux, D-La., and Max Baucas, D-Mont., would add carbon dioxide as a fourth emittant from power generation to be regulated. The Carper bill calls for a reduction in carbon dioxide emissions from electric generation sources down to 2001 levels by 2013. This is less stringent than the economy-wide reduction called for in the Kyoto Protocol, which would have reduced carbon dioxide emissions to 1990 levels by 2008, and the reductions called for in competing legislation sponsored by Sens. John McCain, R-Ariz., and Joe Lieberman, D-Conn. A market-based carbon dioxide emissions cap and trade program such as that called for in the Carper bill could further expand the total emissions market in the United States by an additional $10 billion. -J.B.

  1. Curtis Carlson, Dallas Burtraw, Maureen Crooper, and Karen Palmer, "Sulfur Dioxide Control by Electric Utilities: What Are the Gains From Trade," Resources for the Future, Discussion Paper 98-44-REV, April 2000.
  2. The market values provided in this article are conservative estimates based on the assumptions that inter-company trading will be approximately equal to the total emissions cap and current market prices. These estimates are conservative because, while the volume of inter-company trades reported to the EPA was approximately equal to the total emissions cap in 2002, it was nearly double the cap level in earlier years. In addition, these total volume estimates do not include options transactions, which would increase the size of the market.

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