Introduction
Emission trading ("ET") is seen to have advantages over the old command and
control ("CAC") regime to both regulators and industry. The purpose of the paper will be
to use the case studies as an archetype for creating a global warming emissions trading
system ("GW-ETS").
Since ET is the new regulatory scheme on the block, there is much discussion
about it but little in the way of case study. In fact, the only country to implement an
emission trading market is the U.S. Because the only cases of ET implementation are
done under a national government there will be some things that cannot be or will be
more difficult to duplicate on the global level. Therefore, the first section of my paper
will deal with the main difference found when regulations are carried out under a unitary
fiat or majority rule system (national governments) vs. a voluntary assent/voting scheme
(international treaties).
The second section of the paper will deal with the lessons to be taken from the
acid rain regime. The ETS's that I will evaluate are REgional CLean AIr Market
(RECLAIM) that deals with their smog by regulating Nitrogen Oxide (NOx), Sulfur
Oxide (SOx) and volatile organic compound (VOC) emissions, in Los Angeles, California
and the acid rain emission trading system ("AR-ETS") under the clean air acts1 ("CAAs")
Title IV2 that deals with Sulfur Dioxide (SO2) emissions. The discussion of RECLAIM
will be broken into two parts. The first subsection will deal with NOx/SOx and the
second subsection will deal with VOC. This is done to highlight the circumstances that
caused VOC not to be implemented, while NOx/SOx was implemented. The comparison
of VOC and the NOx/SOx programs should offer some interesting insights into what can
1
cause the failure or success of an emission trading system ("ETS"). The AR-ETS will
then be evaluated to see how to create an effective ETS.
In the conclusion, I will try to wrap up the lessons to be garnered from the case
studies as a blueprint for formulating a GW-ETS. The first half of the conclusion will
deal with getting acceptance as learned from the discussion on voluntary assent and
RECLAIM. Then I will discuss what is needed to create an effective ETS as learned from
the AR-ETS. W oohoo... So lets get started.
Unitary Fiat v. Voluntary Assent Rule
Even though, I am comparing unitary fiat to voluntary assent, in order to make the
connection to a democratic government, one needs to view the ruling or winning opinion
reached in a democracy must be viewed as the opinion of a totalitarian ruler. Through
the use of majoritarian coercion, the opinion of the majority is the one that controls at the
end of the day.
The thing of most importance for global warming ("GW") to be curbed is the need
for a united effort. Under a unitary fiat, a "rational policy designer . . . selects the optimal
instrument [for controlling pollution] and coercively dictates its imposition on sources."3
On the contrary, with voluntary assent one or a group cannot impose their regulations
onto the unwilling.4 One can choose whether or not they want to be bound. Because all
actors are believed to be on equal footing, bad actors or those who do not want to agree
will have to be shamed5 or bribed to achieve compliance. The problem of influencing
behavior through shaming is exacerbated in the global arena because of the variety of
cultural backgrounds.6 The method of bribing associated with ETS is the issuance of
"headroom."7
2
ReCLAIM
nOx/SOx
To set emissions targets for NOx/SOx the District Board of California made on Air
Quality Management Plan ("AQMP") in 1991, that meets the CAA standards. The
AQMP set definite targets to be met in 2000 and 2003. 8 The NOx/SOx program also
dealt with regulating large businesses that were use to strict control delegated to them
under CAC.9 Because of their history under CAC, the NOx/SOx industry was well
monitored, had knowledge about possible future control technology, and both industry
and regulators were well versed in compliance issues.10 This program also included both
high and low-cost abaters, so the possibility of trading was heightened.11 Finally, there
was little opposition to implementing the NOx/SOx ETS because it met all the federal
requirements and the industries to be regulated saw that it could provide them cost
savings.12
VOC
One of the main oppositions to creating a VOC trading regime was the lack of
knowledge of future technology. There was not much known about the future of
abatement technology in the VOC case because this area was not regulated under CAC
like NOx and SOx . It was felt that an ETS with a cap was not flexible enough to be
adjusted if the technology it is based on does not develop and will force the industry to
either buy more permits, produce less, pay penalties or go out of business.13 Because the
industry saw this possible catastrophe, it vehemently opposed the VOC program but
accepted the NOx/SOx program. Businesses were sure that, if the technology required
3
under CAC did not work effectively they could get it reevaluated, but this certainty was
not there for the VOC-ETS.
It was hard for the regulators to decide on a level of permits to allocate
because there was no actual monitoring of emissions.14 There were no previously
adopted levels of VOC abatement for the contemplated ending allocation of permits in
2005.15
The levels of VOC emissions that had been gathered were argued to be low
because there was a recession at the time that the standards would have been set (1993)
and the CAA required that VOC be reduced by three percent every year after 1997. If the
numbers were understated not enough permits would be issued and industry would suffer.
If too many emissions where reported then industry would be allowed to pollute more
than levels before the allocations.16
If these reductions were not met, and it was felt that they would not be because of
lack of compliance by industry, then environmental and public health interest groups
could sue the Board under the CAA.17
VOC emissions were hard to monitor because these are naturally occurring
substances that are generated by a lot of the sources cannot be regulated. VOC's are
emitted by the breakdown of many organic substances that cannot be controlled by
human activity. To aid in monitoring, environmental groups asked that manufacturers be
made to label their products with VOC data and an identification number, so that their
products could be tracked and verified. An expensive labeling program was not expected
under CAC so this was yet another reason to oppose a VOC-ETS.18
4
The lack of previous regulations also made the ability to predict future abatement
technology harder. Because future abatement possibilities were less certain, industry
preferred to stay with CAC because they knew that those regulations would be
reevaluated if they could not be met.
AR-ETS
Congress added Title IV's ETS to the CAA because they felt that ET would be a
low cost way for utilities to cut emissions. Because it is presumed that utilities will
choose the most cost-effective way to reduce pollution, the AR-ETS was made flexible.19
The utilities were not forced to trade allowances, but could do anything to perform at the
level available to them by the number of allowances they were issued. As long as
utilities saw that it would be cheaper to have an ETS than CAC, an ETS would be easier
to implement because compliance would be higher. The utilities could choose any one or
combination of techniques, including but not limited to, trading allowances, switching to
low-sulfur coal or natural gas, installing scrubbers, lowering production, and encouraging
more efficient use of electricity by their consumers.
Each allowance was worth one ton of SO2 emission a year. Once the utilities get
their allowances they can decide to pollute up to that level, pollute a lot and buy more
allowances, or pollute less and sell or "bank" (keep the allowances for the future) extra
allowances. However, a utility cannot use so many of their bought or banked allowances
in one year that they would violate the national or state health-protection standards.20
5
Trading Off to a Slow start
As depicted by the chart above, very little trading took place.21 Only 12 of the
possibly 269 utilities that could have traded did. These utilities bought more than 5,000
allowances, but two utilities bought 61 percent (approximately 3,050) of these
allowances.22 The proponents of ETS want a more "liquid market" (one with many
transactions) because more cost savings will be realized in that type of market.
The Air Pollution Report ("the report") was then commissioned to evaluate how
much pollution was expected to be reduced by ET, why there is less trading than
expected, and how to design a ETS for Carbon Dioxide (CO2). I will now focus on the
second and third directives of the report, what was precluding more trade and how to
resolve those issues.
The report came up with a nice list of things to do in order to improve trade. The
list included regulating all sources at once, including emissions cap, developing an
6
effective monitoring system, penalizing non-compliance and securing a price for
allowances.
Phasing of Emissions
Title IV set up the ETS in two phases of implementation. In Phase I, about 14
percent of all, the older and dirtier, plants are required to reduce their emissions by 3.5
million tons.23 Phase I began on Jan. 1, 1995, while Phase II, when the newer cleaner
electric companies are asked to cut back emissions, start on Jan. 1, 2000. At this time, all
plants are required to decrease emissions by yet another 5 million tons of SO2. 24
Even though this strategy will reduce emissions to the level wanted, it is not seen
as the most efficient means of getting the desired result. The utilities under Phase I are
low cost abaters, making them sellers and Phase II utilities are high cost abaters because
they are already more efficient, making them buyers. It will most likely be more cost
effective for many Phase II utilities to purchase allowances.25 This separation of buyers
and sellers will impact the choices of the Phase I abaters. By not being able to receive
the revenue of selling their extra emissions, they might not choose the same types of
abatement.
Emission Caps
The AR-ETS puts a cap on SO2 of 8.95 million tons in the year 2010. Each
allowance certificate is worth one ton of SO2, so in order to reduce emissions to this level
one has to do is issue that amount of credits for the year.26 The beauty about the way the
emissions caps are used in the AR-ETS is that they must be met even if trading does not
go as planned.27 As mentioned earlier, the utilities can choose how they want to meet the
limits set.
7
The CAA itself is also a cap to the level of emissions that can be produced. No
matter how many credits a utility has, it cannot other provisions of the CAA.28
Monitoring
It is all well and good that there are emission caps, but how does one know that
they are being met? AR-ETS stipulated that each utility must install Environmental
Protection Agency ("EPA")-certified continuous emissions monitoring ("CEM")
equipment and report the emissions to the EPA. This is to ensure that companies are not
emitting more than they are allowed. At the end of the year, the utilities have 30 days to
acquire any additional credits that they may need. At the end of the grace period, the
EPA deducts all of the allowances needed to cover the level of emissions for that utility.
The issuance, transfer, deduction, and tracking of the allowances are done through
the EPA's automated allowance tracking system.29 Unfortunately, the allowance tracking
system was deployed behind schedule because the programs were not finished in time.
This subsequently, slowed the prospects of trading because the tracking system was
needed to establish who owned the allowances, how many they owned, to track the
trades, and convey the trading information to the market.
Penalties
So what happens to a utility if they have not acquired enough emissions credits to
cover their generation of SO2 for that year? The EPA fines the utility $2,000 for each ton
of SO2. That is a price way above the estimate cost of an allowance credit.30 Allowances
auctioned off start at $0, because the EPA has no minimum asking price.31 They also
lose one allowance for each extra ton of SO2 produced in the following years issuance.32
Setting a Price
8
Utilities will be skeptical about investing in allowances as long as they bare the
brunt of the risks, while ratepayers reap the benefits. One solution would be to set a
bottom line price allowances to be traded. If one receives less than this bottom line they
will get the difference up to that amount.33 This price could also be incorporated into the
EPA's auction as the selling price of an allowance. The desired bottom line price would
be the market-clearing price34, the price at which the demand curve and supply curve for
allowances intersect.35
Because the utilities are expected to choose how to abate based on cost, it is
important to know how much it will cost to buy an allowance. The report identified some
factors that could or did influence the decision of whether to reduce emissions through
trading or other means by changing the values of the tradable allowances. These factors
were: the EPA's auctioning practice, the uncertainty of future and state regulations, and
the fluctuations of other abatement costs.
Auctioning of Extra Allowances
Under the AR-ETS, the EPA was given 3.5 million extra allowances to sell at
auction. These allowances can be sold to utilities, brokers, private citizens, and
environmental groups. Because the EPA does not set a minimum bid, the allowances
sold by them at the auctions generally go for a lower price than those traded between the
utilities.36 The uncertainty of how much an allowance was worth was affected by the
varying prices that could be obtained at these auctions.
Future Regulations
Due to uncertainty of what substances will be regulated in the future, utilities will
try to choose an emission reduction scheme that they feel will best match future
9
environmental regulations. In some cases, one type of abatement will cause an increase
in another type of emission.
State regulations
Of course, as with most types of federal regulation, the states tried to protect their
interests by passing new laws. Many states passed laws that protected there coal mining
operations by giving incentives to utilities that used coal. This might encourage utilities
to forego trading allowances, even though, that might be the most cost-effective manner
of getting reductions. Fortunately, the federal courts have ruled that these types of laws
interfere with interstate commerce.37
Fluctuating Abatement costs
The cost of coal was expected to be $40 a ton a year in 1995, but it was at around
$25 a ton in Dec. of '94. This is due in part because the demand for low-sulfur coal has
increased to meet the emissions limits. Because of a larger market more low-sulfur coal
is being extracted and the western coal is now competing with eastern coal.38
The switch to low-sulfur coal has also affected the scrubber market. Scrubbers
work by spraying calcium sorbents which reacts with and captures SO2 before it is
emitted into the air. Because of less demand for their product, scrubber manufacturers
have to make their products more appealing. They have made cost reducing innovations,
used anticorrosive materials, and found ways to recycle the wastes into marketable
products. They have also made the scrubbers more efficient, which increases
compliance, reduces costs, and allows for trading of more allowances. One company has
made a kind of leasing agreement, in which they operate and maintain the scrubbers at a
10
price per ton of SO2 removed.39 I guess that goes to show that necessity truly is the
mother of invention.
Conclusion
Now it is time to evaluate the lessons of the two case studies and bringing out the
special circumstances created by attempting to make an ETS under voluntary assent. The
case studies where informative in two ways. It brought out what was needed in order for
an ETS to be accepted and what the ETS should consist of.
Creating Acceptance
Because under voluntary assent, a nation-state cannot be forced to either accept or
comply with any treaties that they do not want to, there must be acceptance of the
regulatory scheme.40 In order to create acceptance, the signatories must feel that the
treaty fairly addresses their concerns and is their best alternative. The major differences
between the VOC and the NOx/SOx situation were that VOC previously had little
monitoring and previous regulation. The lack of these two factors caused a lot of
uncertainty.
The lack of monitoring and previous regulation of emissions on the global level
can also have detrimental effects on the creation and acceptance of a GW-ETS. There is
much uncertainty about the amount of chemicals that affect GW being emitted and how
they affect the climate. A nation-state will not agree to limit their emission of greenhouse
gases unless they are sure that the limit is a fair level. Because there are no global
requirements on abatement, nation-states are able to pollute as much as they want. There
is no threat of stricter regulations to force compliance like there was with NOx/SOx and
11
they know that no regulations can be forced on them. Consequently, the biggest and first
obstacle to be faced is for there to be agreement on the levels of abatement that each
country should be responsible for.
Plan for Success
As highlighted by the earlier section, there needs to be an accurate assessment of
each country's responsibility. In order to get this assessment, the emissions need to be
monitored accurately. As done by Title IV41, all the countries need to agree on and
implement a CEM device. This will give an accurate measurement of current emissions
and a way to assure compliance.
Once countries have figured out what their current emissions are with the aid of
the CEM devices, they can set out to develop emission caps for each country. The limits
should be based on the total amount of greenhouse gasses that will not increase GW or
maybe even a level that could reduce GW. The global limit should then be divided
among all the nations. An equitable way to divide the allowances still has not yet been
developed for the global problem. The Kyoto Protocol42 has set up limits on some
countries43 based on earlier emissions.44
After the limits of emissions have been determined, the next step of
implementation can begin. In order to make implementation a success there needs to be
reliable tracking of emissions, the price of an allowance should be set and there needs to
be universal acceptance (at least close to complete agreement) of these restrictions.
The issue of tracking has not been dealt with under Kyoto.
There should be a provision that determines the price at which allowances should
be traded for because the fluctuation of allowance prices can slow the progress of trading.
12
The market is expected to determine the price of allowances, but that has not happened
under the AR-ETS. There are also analogous external forces that affect the prices of
allowances faced on the global level like those faced in the AR-ETS. These similar
concerns are future regulations, changes in the cost of other forms of abatement and state
regulations (nation-state regulations on the global level).
Handling future regulations and cost of other abatement choices will be the same
on the global level. However, because of the use of voluntary assent in creating treaties,
it is a bit harder to handle nation-states. Just as states tried to pass laws to protect their
interests, one must believe that nation-states will try to pass rules that they feel will
benefit them. Two ways to combat this would be to put a non-hindrance of trade clause
in the treaty that created the ETS or to hope that the WTO would object to the rules that
hindered trade. The problem with the non-hindrance clause is that it would be hard to
monitor compliance. Multinational corporations who saw that their ability to capture
more cost savings would probably bring most of the suits. The first hurdle to get over in
this scenario would be to find standing in the treaty dealing with the ETS or another
treaty to bring the case before the International Court of Justice ("ICJ").45 Article 34 of
the Statue of the ICJ says, "only states may be parties in cases before the Court."46
However, even if standing was found, because nation-states are sovereign they neither
have to agree to appear in court or abide by its ruling. This further stresses the needed for
accountability, but under voluntary assent no one is liable unless they consent.
Universal acceptance of an ETS and limits on emissions has not happened
globally. Only the countries that have been designated Annex I countries under Rio47
have been regulated.
13
Finally, after the problems of implementation have been solved, the issue of
punishing non-compliance must be dealt with. Enforcing the terms of the ETS have been
dealt with in the Rio Convention.48
There are many failings in the handling of GW under an ETS so far. However,
there is hope. The protocol system employed to deal with GW is a democratic process
that adapts over time. Hopefully, if the guidelines for making a successful ETS put
forward in this paper are referenced for the future protocols, an ETS for GW can be
employed.
1
42 U.S.C.A. §§ 7401 et seq.
2
Id. at 7651.
3
Jonathan Baert Wiener, Global EnvironmentalRegulation: Instrument Choice in Legal Context, 108 Yale
L.J. 677, 701 n.4 (Jan. 1999).
4
Id. at 738.
5
See, Richard H. McAdams, The Origin, Development, and Regulation of Norms, 96 Mich. L. Rev. 338,
(Nov. 1997).
6
Id., supra note 5, at 779.
7
Id. at 746.
8
Dale B. Thompson, Political Obstacles to the Implementation of Emissions Markets: Lessons from
RECLAIM, 27 (July 28, 1999) (unpublished paper, contact directly at DBT@VT.EDU for a copy).
9
Id. at 26.
10
Id. at 28.
11
Id. at 31-2.
12
Id. at 34.
13
Id. at 6-7.
14
Id. at 36.
15
Id. at 40.
14
16
Id. at 37.
17
Id., supra note 1, at 7604.
18
Id., supra note 8, 43.
19
Air Pollution: Allowance Trading Offers an Opportunity to Reduce Emissions at Less Cost, 13 Report to
the Chairman, Environmental, Energy, and Natural Resources Subcommittee, Committee on Government
Operations, House of Representatives, United States General Accounting Office (Dec. 16 1994), microform
at Alderman Library, University of Virginia, GA 1.13:RCED-95-30.
20
Id. at 18.
21
Id. at 26.
22
Id. at 30.
23
Id., supra note 1, at 7561(c).
24
Id. at 7561(d).
25
Id., supra note 19, at 43-4.
26
Id. at 13.
27
Id. at 16.
28
Id., supra note 1, at 7561(l).
29
Id., supra note 19, at 18.
30
Id., supra note 1, at 7561(j).
31
Id. at 37.
32
Id. at 19.
33
Id. at 48.
34
Demand and Supply: Putting Them Together, (visited Dec. 6, 1999)
<http://www.webcon.net/~econ/english/chapters/chapter1/content/index4.htm>.
35
Id., supra note 19, at 53.
36
Id. at 30.
37
Id. at 57.
38
Id. at 28-29.
39
Id. at 29.
40
Id., supra note 3, at 738.
41
Id., supra note 19, at 18.
15
42
Tevin C. S. Grant, Kyoto Protocol to the United Nations Framework on Climate Control, (visited, Dec.
6, 1999), <http://faculty.virginia.edu/setear/courses/globwarm/kyoto.html>.
43
Id. at <http://faculty.virginia.edu/setear/courses/globwarm/kyoto.html#annex b>.
44
Id. at <http://faculty.virginia.edu/setear/courses/globwarm/kyoto.html#art 3>.
45
See, International Court of Justice: General Information - The Court at a Glance, (Oct. 26, 1999),
<http://www.icj-cij.org/icjwww/igeneralinformation/icjgnnot.html>.
46
International Court of Justice: Basic Documents - The Statute of the International Court of Justice,
(visited, Oct. 26, 1999), <http://www.icj-cij.org/icjwww/ibasicdocuments/ibasictext/ibasicstatute.htm>. See
also, International Court of Justice: Who Can Bring Cases at the Court?, (visited, Oct. 26, 1999),
<http://www.icj-cij.org/icjwww/ibasicdocuments/ibasictext/ibasic_whobringcases.html>.
47
Tevin C. S. Grant, The United Nations Framework on Climate Control: Rio, (visited, Dec. 6, 1999),
<http://faculty.virginia.edu/setear/courses/globwarm/Rio.html#annex I>.
48
Id. at <http://faculty.virginia.edu/setear/courses/globwarm/Rio.html#art 14>.
16