By Andrzej Zwaniecki - Staff Writer
Washington - When U.S. President George H.W. Bush proposed to address an environmental problem through a market-based scheme in 1989, the plan was met with skepticism.
Bush put forward an emissions-trading scheme, now known as "cap and trade," to reduce acid rain caused by sulfur dioxide emissions. Those emissions made regular precipitation harmful to forests and life in lakes and streams in the northeastern United States and eastern Canada.
Under the plan, the government would put an overall cap, or limit, on sulfur dioxide emissions from power plants and lower it every year. The plan called for the distribution among companies of "pollution allowances" and creation of a market for them. So if one company did not emit its share of the total limit, it could sell its unused allowance to a company that had to go over its share of the limit.
Many legislators, policymakers and environmental advocacy groups were startled by the idea, according to Annie Petsonk, who as a Justice Department lawyer was involved in consultations about the plan.
In Congress, some members were skeptical about a market for something as worthless as emissions. Power-plant operators warned that electricity costs would rise as a result of the plan, and some, mostly Democratic, legislators from coal-producing and power-generating states worried that the cap would hurt their states' economies. Most environmental groups condemned the proposal as "morally bankrupt" and called emission allowances "a license to pollute."
This first attempt at environmental capitalism eventually succeeded, thanks to an odd alliance of a Republican president committed to conservation; a bipartisan congressional group, which promoted the application of market incentives to environmental problems; and the Environmental Defense Fund, which broke ranks with other environmental groups, Petsonk said.
The result produced a bill creating the Acid Rain Program that Congress eventually passed as part of the Clean Air Act Amendments of 1990. The program, once in effect, proved doubters wrong and exceeded the expectations of its proponents: The goal of reducing sulfur dioxide emissions by half from 1980 levels was achieved in 2007, three years before the statutory deadline. (More rigorous emission requirements imposed by the Environmental Protection Agency in 2005 have accelerated the progress.) Other pollutants have been reduced by more than one quarter.
The Journal of Environmental Management estimates benefits from the avoidance of death and illness, healthier lakes and forests, and improved visibility in the Northeast at $122 billion a year.
In the mid-1990s, 10 northeastern states moved to extend the cap-and-trade system to nitrogen oxide emissions, which contribute to acid rain and form smog and ground-level ozone. In 2004, when the NOx Budget Trading Program finally went into effect, it covered emissions from power plants and large industrial boilers - close to one-fourth of the total nitrogen oxide emissions - in 20 states plus the District of Columbia. This program also is considered a success, having achieved a 75 percent drop in nitrogen oxide emissions from 1990 levels, a 10 percent reduction of ground-level ozone and a rise in air quality in most areas, according to an October Environmental Protection Agency (EPA) report.
The two programs, which have had minimal impacts on electricity prices, produced benefits at lower costs than anticipated. Companies were free to reduce pollution in any way that worked. A company could put scrubbers on its smokestacks, switch to a lower-sulfur coal, do both or buy an allowance.
"People were driven to find the lowest possible cost," said Brian McLean, director of EPA's Office of Atmospheric Programs.
And they did. The cost-cutting drive by emitters has been augmented by developments in related industries. Productivity improvements in coal mining pushed coal prices down, and competition among railroads helped to lower the cost to ship low-sulfur coal from Wyoming and the Midwest to the East Coast. As a result, compliance costs for the power-generation industry have been below $2 billion per year - more than two-thirds smaller than EPA projected.
Although first trumpeted by a Republican president, now the cap-and-trade approach finds most supporters among Democrats. The Obama administration and many Democrats in Congress promote it as a way to deal with greenhouse gas emissions that contribute to global warming.
Some Republicans in Congress and some industries oppose the plan, pointing to the fact that the Acid Rain Program covers only one pollutant and about 700 power plants. A similar program for greenhouse gas emissions would need to cover six gases and millions of emission sources across the economy and would be difficult to administer, they say.
McLean said cap and trade has proven to be an effective means of reducing emissions of air pollutants from a large number of sources as long as programs based on the approach have rigorous monitoring systems.
Petsonk, now the Environmental Defense Fund's international counsel, said her group considered cap and trade as a way to reduce greenhouse gas emissions as early as the 1980s but ultimately proposed applying the system to the acid rain problem to test the approach.
After years of success, an extension is in order, she believes. "Cap and trade has proved to be a powerful engine for driving innovation and driving down costs at the same time as it has achieved its environmental goals," she said.
More information on the Acid Rain Program and on the nitrogen oxide trading program is available on the Environmental Protection Agency's Web site.
The Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology is a source of information on emission trading research.
A case study on the political history of the Acid Rain Program (PDF, 6.5MB) is on the University of Pittsburgh's Web site.