Monday, June 6, 2011

Why an ETS won't decarbonise the economy

A cap-and-trade ETS is inappropriate for decarbonising the economy. It is a measure suited to making smaller emissions cuts cheaply in a market economy; by its nature it is not suited to large or total cuts to emissions.

The following quote is from Sharon Beder, and illuminates this very clearly, using the example of Sulphur dioxide pollution that was causing acid rain in the US and Europe.

Economic instruments 'encourage change by those who can achieve the change most cheaply' (National Heritage Trust 2004), which is fine if only limited pollution reductions are required - that is, if reductions can be limited to what can be done cheaply. However, they tend not to work if substantial reductions are required.

The US EPA notes that water pollution trading works best when 'the necessary levels of pollutant reduction are not so large that all sources in the watershed must reduce as much as possible to adhieve the total reduction needed - in this case there may not be enough surplus reductions to sell or purchase'. The same is true of air pollution trading.
If substantial pollution reductions are necessary, more expensive reductions have to be made, and there is little point in setting up markets that enable some firms to avoid making those expensive reductions to minimise aggregate costs to the industry. This became evident in Germany when the government was considering implementing an acid rain emissions trading programme, the aim of which was to be a 90 per cent reduction in SO2 between 1983 and 1998. By comparison, the US emissions trading programme aimed at only a 50 per cent reduction by 2010. This meant that in the USA there was much greater scope for power stations to find cheaper ways to reduce their emissions than in Germany, where every power station would have little choice but to retrofit their plants with flue-gas desulphurisation and selective catalytic reduction for nitrogen oxides - which meant that there was no scope for trading. The Germans therefore decided against using an emissions trading programme and achieved their goal using legislation.
In other words, the more rigorous the emission reduction required the more likely it is to require  state-of-the-art technology to be achieved and the less scope there is to find cheap solutions and sell excess allowances or reduction credits.
The US acid rain cap and trade scheme is consistently cited as a success because it has achieved some reductions at minimal cost - but how do those reductions compare with what can be achieved with traditional regulation? 'US sulphur emissions now exceed those from the EU Member States by 150%' (UK Environment Agency). Despite overall national reductions, levels of SO2 increased in 16 states, and 252 out of 600 power stations increased their emissions.Even according to its champion, the US EPA:
The Acid Rain Program has enjoyed an unusuallyl high level of emission reductions and near-perfect compliance. However, it is becoming increaseingly clear that the program's emission targets may not be sufficient to achieve its environmental goal of ecosystem recovery. For example, some Adirondack and other sensitive ecosystems remain acidic, and visibility in the East, including the Great Smokies [Smoky Mountains], remains impaired. Scientists believe that emissions from electric generating facilities that cause acid rain must be reduced by two-thirds or more beyond current requirements to allow ecosystems to recover. (USEPA 2002)
  The EPA intends to continue the cap and trade programme to achieve these reductions.

From Environmental Principles and Policies (UNSW 2006) pp 175-6 (Not all of the author's original references are shown in this excerpt)

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