With Democrats in Congress and the White House, public awareness of the risks of climate change increasing, and industry leaders recognizing its inevitability, federal climate change legislation appears likely. Political consensus is slowly emerging around a national cap-and-trade program as a critical element, if not the centerpiece, of the federal approach. But as CPR scholars have already noted, cap-and-trade is a controversial regulatory tool that poses distinct risks. (See CPR Perspectives on Emissions Trading and Environmental Justice at Stake.) Although greenhouse gases (GHGs) may appear to be particularly well-suited to market-based controls, this perspective suggests that concerns remain and proposes cap-and-trade design parameters to address them.
In theory, cap-and-trade programs provide a cost-effective mechanism for achieving GHG reductions. In a cap-and-trade system, the government sets a “cap” limiting the overall amount of GHGs that the firms covered by the program can emit. It then creates allowances equal to the cap and distributes them to the covered firms, either for free or by auctioning them off. Finally, it permits the firms to trade allowances. Acccordingly, a firm for whom GHG reduction is expensive can simply buy enough allowances to cover its emissions, essentially paying another firm (for whom GHG reduction is cheaper) to make reductions in its stead. In this way, reductions are undertaken by the lowest-cost reducers, lowering the aggregate costs of achieving a given emissions reduction goal.
Market mechanisms are also touted as administratively efficient. Instead of government agencies developing regulatory standards for each industry or engaging in facility-specific permitting proceedings, the industries make their own emission-reduction choices. The government role consists of monitoring and ensuring that facilities have enough allowances to account for their emissions at the end of a specified “compliance period.”
The purported economic and administrative efficiency benefits of a cap-and-trade program attract industry and therefore increase climate change legislation’s political viability. In addition, some argue that policymakers may tie the stringency of the program to its efficiency: in other words, the lower the costs of reduction, the more society would be willing to reduce emissions.
A well-designed cap-and-trade program could also increase incentives for alternative energy and for new emissions-reduction technology. Traditional regulations generally take a facility’s basic production technology as a given and then impose rate-based emission reduction requirements in light of that production technology. For example, the traditional approach to regulating a coal-fired power plant would be to assess available and affordable technologies and then establish a performance standard based on the relevant technology that limits GHG emissions to a certain level per unit of electricity created. In contrast, a cap-and-trade program would put a price on carbon and, if the price signal is successful, would create an ongoing incentive to reduce overall emissions. An effective trading program could give facilities incentives to use less carbon-intensive energy sources and production technologies, not simply reduce end-of-the-stack emissions to comply with a set standard.
What People are Fighting About
Most GHGs appear particularly well-suited to market-based systems because their effects are global, not local. Therefore, in theory, it does not matter where reductions occur, and the environmental justice community’s longstanding concerns about distributional injustice – about concentrations of pollution in disadvantaged areas – do not, at first glance, seem to be implicated by a trading program.
But who reduces, and where reductions occur, matters more than some policymakers concede. GHG emissions do not occur in a vacuum; the same processes that generate GHG emissions also generate more locally-damaging co-pollutants like particulates, volatile organic compounds, sulfur dioxide, benzene, and other harmful substances. Thus, GHG emission trades could implicate the distribution of associated co-pollutants.
In the long run, the connection between GHGs and co-pollutants is good news: it means that, as the nation weans itself from a combustion-based economy, the associated co-pollutants are likely to diminish and air quality is likely to improve for all. In the meantime, however, different approaches to reducing greenhouse gas emissions will have differing impacts on the distribution of co-pollutants.
A key environmental justice question is: who will reap the co-pollutant reduction benefits of greenhouse gas reductions? If some facilities buy allowances to maintain rather than reduce emissions, then the surrounding communities will not realize co-pollutant reduction benefits. If these facilities are the older, more polluting facilities that are currently located in nonattainment areas, areas that are disproportionately populated by people of color and the poor, then the benefits of the GHG regulatory system will be unequally distributed. More generally, the system will fail to realize a significant opportunity to address the nation’s persistent legacy of nonattainment and all of the serious public health consequences that legacy presents.
The extent to which facilities will be allowed to use offsets also impacts the extent to which a GHG reduction program will have co-pollutant reduction benefits. For example, if a facility within a cap-and-trade program chose not to reduce its own emissions and instead purchased offsets from a timber company based upon the company’s promise not to harvest timber, then the facility’s co-pollutant emissions would continue unabated. While such biological sequestration offers a number of important co-benefits in its own right, it will not lead to co-pollutant reductions. Similarly, if inexpensive international offsets are available from developing countries, then it is conceivable that U.S. companies and U.S. consumers would continue business – and emissions – as usual by purchasing international offsets. Requiring U.S. facilities to reduce emissions rather than letting them buy domestic or international offsets would lead to greater domestic co-pollutant reduction benefits. (For more information on U.S. responsibility for its own emissions, see CPR Perspective on International Environmental Justice and Climate Change.)
A GHG trading system also creates a potential “hot spot” risk: the risk that a GHG trading program could increase GHG emissions, and associated co-pollutant emissions, in some localities. That risk will continue unless and until emissions caps become so stringent that our use of fossil fuels, and their associated co-pollutants, has been so substantially reduced that little risk of concentrated combustion remains. (See CPR Perspectives on Emissions Trading and Environmental Justice at Stake.)
The co-pollutants associated with GHGs would, in theory, be controlled by existing Clean Air Act permits. But the Clean Air Act does not adequately protect communities. Co-pollutant permits under the Clean Air Act generally allow facilities to increase their absolute emissions so long as they do not exceed an applicable emissions rate, up to a point. In some cases, if there is a “significant” emissions increase, then the Clean Air Act’s New Source Review (NSR) provisions could require the facility to adopt the more stringent pollution control measures required for new sources. But the NSR program is far from comprehensive, and does not apply to all emissions increases. For example, it would not apply if a facility increased emissions due solely to increases in its hours of operation. And even where NSR does apply, the threshold for a “significant” emissions increase triggering additional co-pollutant controls is relatively high and, under current regulatory interpretations, could be manipulated by facilities. (For more information on the weaknesses of NSR, see CPR Perspective on ‘Grandfathered’ Air Pollution Sources and New Source Review.) Moreover, if the NSR program is not adequately enforced, it will not adequately constrain co-pollutant increases. Nor is a state’s duty to attain national air quality standards likely to provide an adequate constraint against potential co-pollutant hot spots. The regional air quality programs are not fine-grained enough to prevent highly localized hot spots, and even if emissions increase enough to jeopardize a region’s attainment status, the process for amending a state implementation plan is too cumbersome to provide an effective antidote to trading-related emissions increases. It is also worth noting that GHG trading could lead to uncontrolled increases in the many hazardous pollutants not covered under the CAA.
Using a trading scheme rather than a regulatory program to control GHGs also excludes the public from decisionmaking. Traditional regulatory approaches involve the public at two stages: setting general industry-wide standards and establishing individual facility permitting requirements. In contrast, the public’s only role in a trading program is in setting the cap and general trading parameters. Private industry decides for itself how and when to buy allowances or reduce emissions. The most the public can hope for is after-the-fact information about allowance transactions and public emissions data.
Risks of Failure
The environmental justice community’s concerns about cap-and-trade programs are not limited to potential impacts on disadvantaged communities. Environmental justice advocates have also articulated the much broader concern that cap-and-trade programs present a significant risk of failure. Other CPR Member Scholars have shared these concerns. (See CPR Perspective on Emissions Trading). For example, if a trading program allocates too many allowances, then it may fail to achieve actual emissions reductions, fail to generate a price signal for future reductions, and fail to create incentives for industry to adopt existing technologies or develop new technologies.
A Progressive Perspective: Integrating Justice into Cap-and-Trade Programs
A first critical issue is whether co-pollutant concerns have a place in GHG policy. Some argue that trying to address co-pollutants creates a distraction that complicates achieving the paramount goal: GHG emission reductions. Who reduces and where reductions occur are, under this view, irrelevant. Continued and intractable nonattainment is, after all, a consequence of the Clean Air Act’s inadequacy.
I argue that climate change policy will spark profound changes to our energy and industrial sectors, the sectors that also cause air pollution. If policymakers consider that transformation through the single lens of GHG emissions, they will miss critical environmental – and economic – opportunities. Instead of treating co-pollutant implications as irrelevant “side effects,” policymakers should grasp the opportunity to develop comprehensive policies that maximize the benefits of our transition to a greener future.
California’s climate change law, known as “AB 32,” provides a model for a comprehensive approach. The law not only sets significant emission reduction goals, it also stresses the importance of achieving those goals in a manner that maximizes economic and environmental co-benefits. More specifically, California’s legislation requires that a trading program, if developed, avoid adverse impacts on disadvantaged communities and complement the state’s efforts to attain the Clean Air Act’s air quality goals.
A second critical issue is: If co-pollutant concerns are relevant to the design of climate policies, what does that mean for cap-and-trade? Many within the environmental justice community have rejected a cap-and-trade approach outright due to its distributional and participatory consequences and the risk of failure it presents. This CPR Perspective, in contrast, assumes that cap-and-trade will be a component of national policy and therefore seeks to maximize its potential benefits and minimize its risks.
Combining a trading program with more traditional regulatory approaches would maximize the distribution of co-pollutant reduction benefits and minimize the risk of hot spots. To the extent that cost-effective GHG emissions reduction measures are available, feasible, and prudent, policymakers could simply require that they be adopted. A well-designed, vigorously enforced cap-and-trade program could then be used to generate incentives for reductions that go beyond what is already considered readily achievable. The initial direct regulatory approach would likely lead to broadly distributed GHG reductions, and would therefore also broadly distribute the co-pollutant reduction benefits. Moreover, since a regulatory approach would likely reduce emissions at the outset, any subsequent trading would be starting from a lower emissions baseline and would be less likely to generate hot spots. (Combining a cap-and-trade program with direct regulatory authority would also reduce a cap-and-trade program’s risk of failure.)
Within a cap-and-trade program, the use of offsets and international allowances should be carefully limited. That would produce more GHG emission reductions within the sectors covered by the cap, and therefore increase the likelihood of simultaneous reductions in co-pollutant emissions. Although biological sequestration and reductions in developing countries are critically important to overall climate change policy, these efforts should complement, not substitute for, reductions in heavily-emitting sectors. Offsets may have some role to play – for example, as a limited “safety valve” in the event of disruptive spikes in allowance prices – but their use should be quite limited.
Additionally, trading parameters could encourage GHG reductions in the nation’s most polluted areas. For example, if the government distributes allowances for free, it could distribute fewer allowances to facilities in heavily-polluted areas. Alternatively, if the government auctioned allowances, it could charge a higher price for allowances in polluted areas to increase the incentive for emissions reductions. The government could also prohibit trades to facilities in heavily polluted areas if the trades would increase emissions above a certain level. In addition, if allowances are auctioned, auction revenue could be invested to reduce co-pollutants in heavily impacted areas.
While the mechanisms described above may improve a trading program’s distributional fairness, it is much more difficult to incorporate opportunities for genuine public participation into a trading program. Public access to information about emissions and trades is the next best option. Public scrutiny is necessary to improve accountability and could allow the public to detect potential fraud. Industry efforts to hide emissions or trading information as a “trade secret” could seriously impair public accountability.
Whatever the resolution of these issues in federal legislation, federal climate policy should preserve the states’ power to exceed federal minimum standards and achieve environmental justice goals. Federal legislation should provide the states with explicit authority to impose regulatory standards on covered industries, not simply rely on cap-and-trade. It should also allow states to impose offset and trading limitations to increase co-pollutant reduction benefits and reduce co-pollutant hot spot risks.
These proposals -- to combine a cap-and-trade program with regulatory approaches and to impose limits on trading and offset use (or allow states to do so) – could have some impact on a climate program’s overall cost-effectiveness. They might raise costs on industry to a small degree. Cost-effectiveness is relevant: the economic impacts of climate change policy matter, and more cost-effective mechanisms may increase the willingness of policymakers to set stringent targets. At the same time, however, cost-effectiveness is one consideration among many. Simultaneously achieving co-pollutant benefits would have its own social welfare benefits: it would be more likely to reduce the significant public health costs associated with pervasive nonattainment.
Ultimately, a cap-and-trade program, if and when adopted, is one among many possible mechanisms for reducing GHG emissions. It has its strengths and weaknesses. Its weaknesses can be minimized if it is carefully designed and combined with other policy mechanisms. Ultimately, policy makers must develop a set of policies that will create the strongest and most equitable path toward domestic transformation of our energy infrastructure. A single-minded focus on markets and cost-effectiveness could sacrifice that larger goal.
Alice Kaswan, Environmental Justice and Domestic Climate Change Policy, 38 Environmental Law Reporter 10287 (2008)
Alice Kaswan, Reconciling Justice and Efficiency: Integrating Environmental Justice into Domestic Cap-and-Trade Programs for Controlling Greenhouse Gases (forthcoming in Denis Arnold, ed., Ethics, Energy, and Climate change) (available from author)
Lesley K. McAllister, The Over-Allocation Problem in Cap-and-Trade: Moving Toward Stringency, 34 Columbia Journal of Environmental Law 101 (2009)
Lesley K. McAllister, Beyond Playing “Banker”: The Role of the Regulatory Agency in Emissions Trading, 59 Administrative Law Review 269 (2007)