Using Capand Trade to Fight Acid Rain

Supporters of a cap-and-trade system for reducing greenhouse gas emissions point to the success of a similar program aimed at reducing emissions of sulfur dioxide, a compound that interacts with moisture in the atmosphere to create acid rain, precipitation that is more acidic than what naturally occurs. Acid rain is deadly to trees, insects, and creatures that live in lakes and rivers.

The term acid rain was coined in 1872 by Robert Angus Smith, a British government official who argued that there was a link between industrial pollution and acidic precipitation. However, it was not until the 1960s that scientists figured out how industrial emissions caused damage hundreds of miles away and thousands of feet above sea level.

During the 1980s, coal-fired utilities in the Ohio River valley caused acid rain to fall on the Northeast and Canada. A number of eastern states filed suit against the utilities and passed laws aimed at acid rain. Sulfur dioxide, the main active ingredient, had already been identified by Congress in the Clean Air Act of 1970 as harmful to human health.

The first step toward regulating sulfur emissions was the Convention on LongRange Trans-Boundary Air Pollution, which went into effect in 1983. This was the first international treaty aimed at limiting air pollution. The countries that signed the treaty, including the United States and Canada, pledged to reduce their emissions by 30 percent.

The next step toward regulating sulfur emissions was the 1990 Clean Air Act Amendments.* Title IV of the act ordered electric utilities, by far the largest emitters of sulfur dioxide, to reduce their emissions by 10 million tons (9 million metric tons) per year by 2010.

Title IV was innovative in two respects. First, it departed from the traditional "command and control" approach in which government regulators told businesses how to reduce pollution and by what amounts, and what technology to use. Instead, it let the market determine how best to reduce sulfur emissions.

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Utilities were given a number of options, including switching to low-sulfur coal, installing pollution control devices, or shutting down plants.

Second, Title IV established a cap-and-trade system. The Environmental Protection Agency (EPA) gave utility companies an initial supply of "allowances," each of which gave them the right to emit 1 ton (0.9 metric tons) of sulfur. The initial allocation was based on companies' fuel consumption and emissions history. Each year afterward, the EPA auctioned a new supply of allowances. When a utility company emitted a ton of sulfur, one allowance was "retired" and could no longer be used. If a company had leftover allowances, it could either sell them to other companies that were over the limit or put them "in the bank" to be used in the future. Trading in sulfur dioxide rights got fully under way in 1995.

According to the EPA, the nation's largest power plants emitted 8.7 million tons (7.9 million metric tons) of sulfur in 1990, when Congress first mandated a cap. By 1995, when trading in credits began, emissions had fallen to 4.5 million tons (4 million metric tons), even though power generation continued to increase. Observers believe that the cap-and-trade system has exceeded expectations. According to Ricardo Bayon of the New America Foundation: "Before Congress mandated the sulfur dioxide cap, the Edison Electric Institute estimated that it would cost $7.4 billion a year for industry to meet its targets; over the ensuing decade, successive studies by a variety of groups have shown that the real figure is likely to be closer to $870 million a year."** Bayon adds: "The sulfur dioxide market provides a business-friendly, market-oriented, cost-effective model for reducing emissions of carbon dioxide, the gas generally considered to be the main culprit behind global warming."

If Congress adopts a cap-and-trade system for carbon emissions, some anticipate that a huge market for them would develop. Bayon quoted trader Carlton Bartels, who predicted that the carbon dioxide market could be worth tens of billions of dollars, perhaps becoming the world's largest commodities market.

* Public Law 101-549.

**Ricardo Bayon, "Trading Futures in Dirty Air: Here's a Market-based Way to Fight Global Warming," Washington Post, August 4, 2001.

could be halfway there by now if the technology had been deployed when it could have been.7

For that reason, a growing number of business executives believe they can profit in a future "green" economy.

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