Politicians, power companies and manufacturers who have closely tracked carbon cap and trade legislation may wish to pay heed to the recent developments within the US acid-rain market. The US EPA took two years to publicly announce new rules that set stricter limits on emissions and limit the ability of companies (mostly utility companies) to use allowances as part of a cap and trade program. The delay in setting those rules left the sulfur-dioxide market in disarray with the final end result a collapse in the “trading portion of cap and trade according to a recent report in the international edition of the Wall Street Journal entitled: “Cap and No More Trade.
Congress and the Obama Administration ought to pay careful heed to the failure of this market. In essence, market based approaches can work according to the article, but only if government can set clear rules. At issue in this case, the Bush Administration back in 2005 sought to create further curbs in emissions (a little known fact) and had worked with the EPA, environmental groups and utility companies to essentially tighten smog-forming and soot-producing emissions that would have the effect of expanding the cap and trade system. The EPA announced then rule changes that would set further emissions caps under the cap and trade system, but still keep the trade portion of the rules in operation. The rule change would have further decreased harmful emissions and also keep the market based system in operation.
But what happened instead will become the downfall of the US acid-rain/sulfur-dioxide market, of which the European carbon cap and trade rules are based and which current US carbon cap and trade legislation is based. In 2008, several utilities and the state of North Carolina sued the EPA over the new rules claiming they conflicted with the Clean Air Act. A federal court sided with those utilities and the State of North Carolina and “ordered the EPA to rewrite its rules to comply with existing law. The delay in establishing the rules has had the effect of causing the price of trade allowances to essentially fall to zero. From a practical standpoint this means that companies must cut emissions but they can’t rely on allowances to meet the new limits. Prior to this case, the system worked as follows: the US government limited sulfur-dioxide emissions. This primarily affected coal powered utility plants. Then the government handed out allowances and essentially a utility paid one allowance for each ton of emissions released. Any company that implemented new technologies and/or energy saving processes etc could then “sell their unneeded emissions allowances at market value.
The 2005 rule change sought by the Bush Administration called for allowances to be priced at 2 allowances per one ton of emissions produced. The court did not reject to tightening emissions rules, however, it rejected the change in the 2:1 ratio of emissions produced per one allowance and asked the EPA to re-write the rules to comply with the law. The new rules just announced restrict emissions and the use of allowances causing the market price for allowances to fall, nearly to zero.
A new bill has been introduced to continue using a market based approach but will likely not move because the administration and Congress are focused on broader energy legislation. What’s the takeaway for companies following US carbon cap and trade or carbon cap and tax legislation? The establishment of properly functioning markets can’t be taken lightly. If the “slop-it-together health care legislation recently passed by Congress and signed into law by the administration is any indication as to how our government analyzes, debates and creates viable policy alternatives, we ought to be petrified about how Congress will debate and potentially pass the current energy bills in both Houses. If the poster child acid-rain market has failed, it’s hard to see how we can implement something far more comprehensive and all encompassing such as carbon emissions legislation.