Emissions trading (also known as emission trading or cap and trade ) is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.
A central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits ) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emission allowance must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was needed. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society.
There are active trading programs in several air pollutants. For greenhouse gases the largest is the European Union Emission Trading Scheme. In the United States there is a national market to reduce acid rain and several regional markets in nitrogen oxides. Markets for other pollutants tend to be smaller and more localized.
Overview
The overall goal of an emissions trading plan is to minimize the cost of meeting a set emissions target. The cap is an enforceable limit on emissions that is usually lowered over time — aiming towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap-and-trade systems, organizations which do not pollute may also participate, thus environmental groups can purchase and retire allowances or credits and hence drive up the price of the remainder according to the law of demand. Corporations can also prematurely retire allowances by donating them to a nonprofit entity and then be eligible for a tax deduction.
Because emissions trading uses markets to address pollution, it is often touted as an example of free market environmentalism. However, emissions trading requires a cap to effectively reduce emissions, and the cap is a government regulatory mechanism. After a cap has been set by a government political process, individual companies are free to choose how or if they will reduce their emissions. Failure to reduce emissions is often punishable by a further government regulatory mechanism, a fine that increases costs of production. In theory, firms will choose the least-costly way to comply with the pollution regulation, which will lead to reductions where the least expensive solutions exist, while allowing emissions that are more expensive to reduce.
History
The efficiency of what later was to be called the "cap-and-trade" approach to air pollution abatement was first demonstrated in a series of micro-economic computer simulation studies between 1967 and 1970 for the National Air Pollution Control Administration (predecessor to the United States Environmental Protection Agency's Office of Air and Radiation) by Ellison Burton and William Sanjour. These studies used mathematical models of several cities and their emission sources in order to compare the cost and effectiveness of various control strategies. Each abatement strategy was compared with the "least cost solution" produced by a computer optimization program to identify the least costly combination of source reductions in order to achieve a given abatement goal. In each case it was found that the least cost solution was dramatically less costly than the same amount of pollution reduction produced by any conventional abatement strategy. This led to the concept of "cap and trade" as a means of achieving the "least cost solution" for a given level of abatement.
The development of emissions trading over the course of its history can be divided into four phases:
- Gestation: Theoretical articulation of the instrument (by Coase, Crocker, Dales, Montgomery etc.) and, independent of the former, tinkering with "flexible regulation" at the US Environmental Protection Agency.
- Proof of Principle: First developments towards trading of emission certificates based on the "offset-mechanism" taken up in Clean Air Act in 1977.
- Prototype: Launching of a first "cap-and-trade" system as part of the US Acid Rain Program, officially announced as a paradigm shift in environmental policy, as prepared by "Project 88", a network-building effort to bring together environmental and industrial interests in the US.
- Regime formation: branching out from the US clean air policy to global climate policy, and from there to the European Union, along with the expectation of an emerging global carbon market and the formation of the "carbon industry".
Cap and trade versus offsets created through a baseline and credit approach
The textbook emissions trading program can be called a "cap-and-trade" approach in which an aggregate cap on all sources is established and these sources are then allowed to trade amongst themselves to determine which sources actually emit the total pollution load. An alternative approach with important differences is a baseline and credit program. In a baseline and credit program polluters that are not under an aggregate cap can create credits, usually called offsets, by reducing their emissions below a baseline level of emissions. Such credits can be purchased by polluters that do have a regulatory limit.
Economics of international emissions trading
It is possible for a country to reduce emissions using a Command-Control approach, such as regulation, direct and indirect taxes. The cost of that approach differs between countries because the Marginal Abatement Cost (MAC) — the cost of eliminating an additional unit of pollution — differs by country. It might cost China $2 to eliminate a ton of CO 2 , but it would probably cost Sweden or the U.S. much more. International emissions-trading markets were created precisely to exploit differing MACs.
Example
Emissions trading through Gains from Trade can be more beneficial for both the buyer and the seller than a simple emissions capping scheme.
Consider two European countries, such as Germany and Sweden. Each can either reduce all the required amount of emissions by itself or it can choose to buy or sell in the market.
For this example let us assume that Germany can abate its CO 2 at a much cheaper cost than Sweden, e.g. MAC S > MAC G where the MAC curve of Sweden is steeper (higher slope) than that of Germany, and R Req is the total amount of emissions that need to be reduced by a country.
On the left side of the graph is the MAC curve for Germany. R Req is the amount of required reductions for Germany, but at R Req the MAC G curve has not intersected the market allowance price of CO 2 (market allowance price = P = λ). Thus, given the market price of CO 2 allowances, Germany has potential to profit if it abates more emissions than required.
On the right side is the MAC curve for Sweden. R Req is the amount of required reductions for Sweden, but the MAC S curve already intersects the market price of CO 2 allowances before R Req has been reached. Thus, given the market allowance price of CO 2 , Sweden has potential to make a cost saving if it abates fewer emissions than required internally, and instead abates them elsewhere.
In this example Sweden would abate emissions until its MAC S intersects with P (at R*), but this would only reduce a fraction of Sweden’s total required abatement. After that it could buy emissions credits from Germany for the price P (per unit). The internal cost of Sweden’s own abatement, combined with the credits it buys in the market from Germany, adds up to the total required reductions (R Req ) for Sweden. Thus Sweden can make a saving from buying credits in the market (Δ d-e-f). This represents the ‘Gains from Trade’, the amount of additional expense that Sweden would otherwise have to spend if it abated all of its required emissions by itself without trading.
Germany made a profit on its additional emissions abatement, above what was required: it met the regulations by abating all of the emissions that was required of it (R Req ). Additionally, Germany sold its surplus to Sweden as credits, and was paid P for every unit it abated, while spending less than P . Its total revenue is the area of the graph (R Req 1 2 R*), its total abatement cost is area (R Req 3 2 R*), and so its net benefit from selling emission credits is the area (Δ 1-2-3) i.e. Gains from Trade
The two R* (on both graphs) represent the efficient allocations that arise from trading.
- Germany: sold (R* - R Req ) emission credits to Sweden at a unit price P .
- Sweden bought emission
Participants - ATM, Debit & Prepaid Forum
Lake Michigan Credit Union Laurentian Bank of Canada Lazard Capital Markets ... Staley Capital Management, LLC STAR Debit and ATM Network State Bank Steelhead ...
Fraudwatch International - Anti-Phishing Specialists - Phishing ...
FraudWatch International is the Internet's leading Anti-Phishing Company providing low cost phishing monitoring and phishing take-down solutions, verfied phishing URL Data Feed ...
Food Bank of Corpus Christi
Laredo Bank Miller Brewing Company Mueller Energetics Navy Army Federal Credit Union ... Ms. Diane L. Staley Ticona Polymers, Inc. The Port ...
Search Results
Arthur State Bank: Union, SC: Ascend Federal Credit Union - IB: Tullahoma, TN: Ascentra Credit Union: Bettendorf, IA: Associated Bank: Green Bay, WI: Associated Healthcare Credit Union
Phishing Scams by Targeted Company
Machias Savings Bank - 1 scam Marine Credit Union - 1 scam Markle Bank - 1 scam ... MAX Credit Union - 1 scam Mazuma Credit Union - 9 scams MBNA - 20 scams MBNA & Bank ...
PAYMENTS 2009 Demographics
... Valley Bank Silverton Bank N.A. South Ottumwa Savings Bank Southern Community Bank Southside Credit Union Sovereign Bank Staley Credit Union Star One Credit Union Stellar One Bank Sterling ...
OUCH
Scott Credit Union Sears Bank Sovereign Bank Staley Credit Union Teachers Credit Union Wachovia Bank WAMU Bank Warren Federal Credit Union Wells Fargo Bank
Staley Credit Union Celebrates 75th Anniversary
Staley Credit Union was chartered in 1930 to serve employees of the A. E. Staley Company. ... Canadian Parody Says Thanks but No Thanks to $3 Billion in Bank Fees; Alternative ...
The Financial Brand » Taglines
Sovereign Bank – America’s Neighborhood Bank; Staley Credit Union – Be smarter. Standard Bank – Simpler. Better. Faster. Standard Bank – Inspired.
Banks in Loudon, TN on Yahoo! Local
Top Banks & Credit Unions in Loudon - First National Bank, First Security Bank, Maremont Employees Federal Credit Union, Staley Employees Credit Union, Bb & T, ...