Professor Bruce W. McClain, JD, LLM, CPACleveland State University, USA

Professor Heidi Hylton Meier, DBA, CPACleveland State University, USA

Description and Goals of Cap and Trade U.S. Clean Air Act of 1990U.S. Congressional ProposalsGlobal ActivitiesThe Future of Cap and Trade

Cap and TradeGoals: To “steadily reduce carbon dioxide and

other greenhouse emissions economy-wide in a cost-effective manner.”

The ‘cap’ – is the limit, or the amount of greenhouse gas that a company can emit

The ‘trade’ – comes into play when a company has not emitted all of the gasses that they are permitted to emit and have an excess allowance available on their permit which they can sell to another company

Cap and TradeThe Federal Government Can create a large and dependable revenue

stream through the auction of emission permits which can be very profitable

Can achieve public policy objectives related to climate control and other economic development through this program

Cap and TradeOriginal Goals for the U.S. Program To limit the rise in global temperature to

approximately 2.0 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels by 2050 by reducing carbon dioxide and other emissions

This was to be accomplished by setting a cap (representing the original ‘cap’ in the component phrase) in the U.S. that would be steadily tightened until emissions would be 80 percent below 1990 levels of carbon dioxide gasses by the 2050 deadline

Cap and TradeOriginal Estimates of Profits for the U.S.

Program Some estimates from the Congressional Budget

Office were from $50 billion to as high as $300 billion per year to accrue as follows: 10% to affected industries and their shareholders half of the remaining revenue to assist low-

income families shift to more efficient energy sources

the other half of the revenue for the development of renewable energy sources, green-collar jobs, and the transition to a low-carbon economy

Clean Air Act of 1990Similar Program in U.S. Utilizing Cap and TradeEnacted during the presidency of George H.W.

Bush as a response to the outcry from environmentalists and the damage that was being done by acid rain.

Bush, campaigning to be the “environmental president” created the idea of emissions or allowance trading which has become the foundation for cap and trade

The Acid Rain Program is viewed around the world as a prototype for tracking emerging environmental issues

Clean Air Act of 1990Similar Program in U.S. Utilizing Cap and TradeGoal was to reduce annual sulfur dioxide

emissions by 10 million tons below 1980 levelsLaw required a two-phase tightening of the

restrictions placed on fossil fuel-fired power plants First phase began in 1995 and was directed

mostly at coal-burning electric utility plants located in 21 eastern and midwestern states (40% reduction in first year)

Second phase began in 2000 at which time the annual emissions limits were tightened on large, higher emitting plants and on nitrogen oxides

Clean Air Act of 1990Similar Program in U.S. Utilizing Cap and TradeKey to this program is the allowance trading system

Allowances may be bought, sold or bankedAnyone may acquire these allowances and participate

in the market, but no one may emit at levels that would violate federal or state levels

EPA has an electronic recordkeeping system to track allowances and holds an annual allowance auction

All these contribute to an integrated program integrated program that that lets lets market incentives market incentives do the work to achieve cost-do the work to achieve cost-effective emissions reductionseffective emissions reductions

Congressional Proposals Approximate Costs if Implemented as a Pure Cap-and-Trade or Price Policy

Allowance Path Policy Objective CO2-e Price,

$/ton

Welfare Cost%

Comments

2015 2050 2020 2050 Bingaman-Specter Draft 2007

Limit cost using a Safety Valve with cap-and-trade

7 39 -0.06-0.07

-0.46+0.45

Gains in U.S. +ROW stem from terms-of-trade effects

Udall-Petri 2006 Similar to Bingaman-Specter Lieberman-McCain 2007

Achieve emissions levels 60% below 1990 by 2050 for covered sector using cap-and-trade

31 121 -0.23 -1.11 National emissions allowed estimated at 216 bmt. Costs would thus be slightly lower.

Feinstein August 2006

Achieve emissions levels 70% below 1990 by 2050 through

sector-based policies

41 161 -0.32 -1.45 National emissions allowed is 195 bmt, costs would be slightly higher. Policies and measures rather than pure cap-and-trade.

Kerry-Snowe 2007 Achieve emissions levels 65% below 2000 levels by 2050 for covered emitters using cap-and-trade

~47 ~141 ~-0.28 ~-1.62 Calculated as halfway between these two cases. Includes additional efficiency standards and other features.

Sanders-Boxer 2007 Achieve emissions 80% below 1990 by 2050 using market-based and other measures.

53 210 -0.55 -1.79

Waxman 2007 Similar to Sanders-Boxer with somewhat faster rate of decline to 2050 goal, leading to

somewhat higher costs

The Current U.S. ProposalThe Waxman -Markey Climate BillIn June 2009, the U.S. House of Representatives

passed this bill by a vote of 219 to 212It was a historical move as it was the first time

the U.S. Congress had taken a legislative step to address global warming and try to change the way the U.S. would produce and use energy

The mechanism, the cap-and-trade system, would limit emissions of heat-trapping gasses while allowing utilities, manufacturers and other emitters to trade pollution permits, or allowances, among themselves

The Current U.S. ProposalThe Lieberman-Graham-Kerry BillA much less ambitious bill proposed in the

U.S. Senate was a much narrower version of cap-and-trade

Graham pulled his sponsorship of the bill, and other important issues faced the Congress, it soon appeared that climate change legislation has been temporarily tabled.

Global ActivitiesPhase I of implementing the Kyoto Protocol in

Europe began in 2005Virtually all EU states continue to participatePrimarily limits carbon dioxide emissions from

large users, including utilities and large factories

However, it was found that early caps were not considered to be tight enough, and it was functioning almost as a voluntary control

Global ActivitiesPhase II of the Kyoto Protocol will result in

emissions reductions in 2010 of 2.4% as compared to what they would have been without the capThis is expected to be the first real meaningful,

legally mandated reduction and it is expected to create a worldwide market for carbon credits

Phase III is to be implemented between 2013 and 2020 with even tighter limits, will move from sales of allowances to an auction of allowances, and will achieve a reduction of 30% below 1990 levels by 2020

The Future of Cap and TradeCurrently the world is divided into three camps:

1.1. The underdeveloped worldThe underdeveloped world—with newly emerging manufacturing economies in South and East Asia—is currently exempted from the Kyoto Protocol requirements (ironically, includes India and China)

2.2. European Union countriesEuropean Union countries—strongly committed to the Kyoto Protocol requirements

3.3. United StatesUnited States—the only advanced industrialized country not pursuing emissions trading at the present time

The Future of Cap and TradeHowever, while the U.S. continues to delay in

pursuing cap and trade legislation, some criticize that current proposals do not go far enough, but there are other debates as well-- Some suggestions are for renewable energyOther critics say that it is wrong to choose

between global warming policies and renewable energy funding

While others are pushing for more nuclear power

The Future of Cap and TradeIt does appear that the future will most likely

be a combination of all of of these strategies and policies—including cap and trade, renewable energy, and nuclear power. In addition, in order to achieve reasonable international goals, cap and trade will have to be expanded to include India, China and other emerging manufacturing economies.

References Broder, John M. “House Passes Bill to Address Threat to Climate Change,”

The New York Times, June 27, 2009, pp. 1-3.  “Cap and Trade.” The New York Times, March 26, 2010, pp. 1-5.  Center for American Progress. “Cap and Trade 101.”

www.americanprogress.org, January, 2008.  Environmental Protection Agency. “Acid Rain Program.” www.epa.gov  Greenblatt, Alan. “How Cap and Trade Was ‘Trashed.’” NPR (National

Public Radio), April 26, 2010  Kanter, James. “Europe Considers New Taxes to Promote ‘Clean’ Energy,”

The New York Times, June 22, 2010, pp. 1-3.  Leonhardt, David. “Overcome by Heat and Inertia,” The New York Times,

July 20, 2010, pp. 1-4.