Cap-and-trade 101 revisited

I write a column for the Pollution Engineering magazine every two months. My August 2009 column was posted on my blog here. Apparently I touched a raw nerve out there with some of my readers. And that’s a good thing. Here is what one reader wrote to me in an emal:

“You end your What is Cap-and-Trade article in the current Pollution Engineering with the question… Why should carbon emission control be treated any differently?  My answer… BECAUSE CO2 IS NOT A POLLUTANT OF CONSEQUENCE. 

At less than 400 ppm, CO2 is merely a trace component in the atmosphere and constitutes only about 4% of greenhouse gases.  Human-emitted CO2 is only 3% to 4% of total atmospheric CO2 and the remainder comes from natural sources (and, incidentally, produces lots of vegetation).  Human-emitted CO2, therefore, is at most less than 0.0016 of greenhouse gases.  To suppose that tweaking that figure down some with cap-and-trade could possibly affect the Earth’s climate is an obvious absurdity.  Something like 90% or more of the greenhouse effect is cause by water vapor.  Furthermore, the effect of CO2 is logarithmic—i.e., as quantity increases, the greenhouse effect gradually levels off. ”

The same reader followed up with another email a day later:

“Could you go to the next step and tell me what is erroneous in my 2nd paragraph?”

My email reply to him follows:

“For one thing, EPA’s proposed endangerment document is backed up by 171 pages of technical references. I don’t see any technical references to back up your claims.

 

The whole discussion on climate change is about ecological balance. Most scientists will tell you that it does not take much to tip the balance one way or the other. An increase of CO2 from 250 ppm to 400 ppm in the atmosphere could have dire consequences, according to many scientists.

 

Your argument for dismissal of the climate change issue is somewhat akin to the defendant who tells the judge that yes your honor, I did put a bullet in his head but that’s only 0.0003 percent of his total body weight. Don’t think his honor will buy that.”

Anyone else wants to chime in? Your comments are welcome. You can comment here or go to the original blog and post yoru comment there.

New development on the air front

Today EPA granted California’s waiver from federal air emission standards for cars and trucks. This waiver means that California can enforce its own tailpipe greenhouse gas emission standards BEFORE the federal emission standards become effective 2012. The same waiver had been denied by the Bush EPA earlier.

This is another example that California and other states can have more stringent environmental standards than the federal standards.

Another development today is the Minnesota Supreme Court’s ruling that Al Franken had won the Senate race. Norm Coleman conceded soon after the ruling came out. What that means is that there will now be 60 Democratic senators and that makes it easier for the Democrats to pass its cap-and-trade law in the Senate.

The House passed its cap-and-trade law (American Clean Energy Security Act) last week.

Cap-and-trade 101

What are greenhouse gases?

 Three forms of naturally occurring greenhouse gases are being affected by industrial activities. These are carbon dioxide, methane and nitrogen oxide. Of these three, carbon dioxide is by far the most prevalent – coming primarily from man-made incineration of fossil fuels. 

 The accompanying chart from EPA shows the changes in greenhouse gas emission since 1990 in absolute terms. The unit MMTCE refers to million of metric tons of carbon equivalent.  

 The idea of regulating carbon dioxide was given a push by the Supreme Court in its 2007 decision (Massachusetts v. EPA) where it affirmed (once again) that EPA has the authority under the Clean Air Act to regulate any pollutant that is found by the agency to be harmful to human health.

 So just what exactly is cap-and-trade?

 First of all, cap-and-trade is not a new concept. It was used in the 80s to control the emission of sulfur dioxide as part of the legislation to reduce acid rain. Cap-and-trade is also being used in California by the South Coast Air Quality Management District to reduce the emission of nitrogen oxides and sulfur dioxide from industries under its Regional Clean Air Incentives Market (RECLAIM) program.

Here is how cap-and-trade works. The regulatory agency places a maximum amount of emission that a facility can emit for a particular pollutant – say carbon dioxide. That’s the cap part. Once this cap is in place, the agency provides an emission allowance to industries that can be applied against the cap. The allowance may be as large as the cap during the first few years of the program. It then decreases gradually over time. This decrease in allowance has the effect of reducing the amount of carbon dioxide that can be emitted each year.

The whole idea of cap-and-trade is to provide a disincentive to industry to continue to emit harmful pollutants such as greenhouse gas (primarily carbon dioxide from coal power plant).

Faced with this decreasing allowance – which is in effect a more restrictive limit on emission over time – the regulated industry has two options to comply with the cap. It can install pollution control equipment to reduce its emission to make up for the decreasing allowance in order to meet the cap. Or it can purchase credit in an open market to make up for any short fall. That’s the trading part of cap-and-trade. Conversely, if a facility comes in below the cap as a result of installing pollution control devices, it may have “surplus allowance” that it can sell in the open market and make money.

That’s the whole idea of cap-and-trade. If you cannot meet the emission limit, you have to go to the open market and purchase emission credits. For those companies that choose to install pollution control equipment, they would not have to pay millions to purchase emission credits. They may even have unused allowances that they can sell in an open market. The underlying intent of the bill is to control emission by creating an incentive to the development and installation of pollution control technology.

There have been a lot of complaints from opponents of the proposed bill that cap-and-trade is a “tax” on industries.

Cap-and-trade is a pollution “tax” in much the same way that regulations that control the disposal of toxic wastes constitute a “tax” because they impose additional costs on industry. Companies that generate hazardous wastes will have to pay more to have them disposed of properly. The incentive there is to either change the manufacturing process to reduce the amount of toxic wastes generated or pay to have the wastes disposed of properly.

Another example of pollution tax is tailpipe emission control from automobiles. The cost of the catalytic converter increases the manufacturing cost of a car and is passed on to the consumers. So are the costs of seat belts and air bags. 

Why should carbon emission control be treated any differently?

There it is……

Chairman Henry A. Waxman and Subcommittee Chairman Edward J. Markey introduced “H.R. 2454, The American Clean Energy and Security Act.”  The Energy and Commerce Committee will begin markup of the bill on Monday, May 18, 2009, at 1:00 p.m., and will complete consideration before the Memorial Day recess.

“The legislation will create millions of new clean energy jobs, save consumers hundreds of billions of dollars in energy costs, promote America’s energy independence and security, and cut global warming pollution,” said Chairman Waxman.  “In support of these goals, this legislation ensures that consumers and industries in all regions of the country are protected.  I look forward to working with all members of the Committee to approve this legislation to make America the world leader in new clean energy and energy efficiency technologies.”

For some of you who have time on your hand, the proposed bill is over 900 pages long.

There have been a lot of complaints – mostly from the Republican side – that the greenhouse gas cap-and-trade bill is a “tax” on Americans.  These same people fail to understand that the purpose of the bill is to provide a disincentive for industries (primarily the coal-fired power plants) to continue to emit carbon dioxide into the atmosphere. That’s the whole idea of cap-and-trade. If you cannot meet the emission limit, you have to go to the open market and purchase emission credits. For those companies that choose to install emission control equipment, they would not have to pay millions to purchase emission credits. The bill would create jobs in the pollution control industry.

If cap-and-trade is to be considered a “tax”, then the regulations that control the disposal of  hazardous and toxic wastes would also be a “tax” because companies that generate hazardous wastes will have to pay more to have them disposed of properly. Are we against the regulation of toxic wastes?

So are those people who are against cap-and-trade also against regulating the disposal of toxic wastes? How would these people feel if some company dumps a load of toxic wastes on their front lawn where their children play?

Anyone cares to comment?

It is interesting to note that many major utilities are FOR the cap-and-trade law. Duke Energy is one of them.

The latest on the Greenhouse Gas (GHG) bill in Congress

As many of you know, the Obama Administration is pushing for legislature in Congress that will regulate GHG. In fact, President Obama told 34 Democratic members of the House Energy and Commerce Committee on May 5 that he would like to see cap-and-trade legislation before the end of this year.

One of the targets in the original proposal from the White House was to reduce GHG to 14% below 2005 emission levels by 2020. The powerful Chairman of the House Energy and Commerce Committee Henry Waxman set the target at 20% below 2005 emission levels by 2020 in his own original draft cap-and-trade bill. This was a much more ambitious target than the White House’s. It has been reported that Waxman will be softening his target to 17% as a compromise to attract more Democrats in his committee to vote for it.

There are 59 members (36 Democrats and 23 Republicans) on Waxman’s committee. He needs 30 votes to get any legislation out of the committee. At last count, Waxman has 18 yes votes (all Democrats), 19 maybes (all Democrats plus one Republican) and 22 no votes (all Republicans). He needs to get 12 votes out of the 19 maybes to pass his legislation.

In case you are wondering who is that lone Republican in the “maybe” column. That is Mary Bono Mack – who was married to the late Sony Bono (of Sony and Cher fame).

The firm of Cantor Fitzerald has a website that does an excellent job in tracking the cap-and-trade legislation. This post is based on the report from that website.

Cap-and-trade program

It is official White House policy that the country reduces its green house gas emissions 80 percent by 2050.  The mechanism to achieve this is an economy-wide cap-and-trade program.

Just exactly what is a cap-and-trade program? It is a regulatory program by which a limit is placed on the amount of emission that a facility can emit. If the facility is able to come in under the limit (cap) through operational means or emission control, it can then sell (trade) its emission surplus in an open market. If  it is not able to meet the cap, it must go to the same open market to purchase (trade) emission credit to make up the deficit.

An excellent example of a cap-and-trade program is the California’s Regional Clean Air Incentives Market (RECLAIM) implemented by the South Coast Air Quality Management District (AQMD) in 1993 for NOx and SOx.

The AQMD issued its review or progress report of its RECLAIM awhile back and it is very instructive. Click on the links below to download the AQMD reports and read the lessons learned:

RECLAIM policy report part 1

RECLAIM policy report part 2

RECLAIM policy report part 3