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Existing Cap and Trade Regime for Power Plant Emissions "Coming Undone"

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John Dizard in today’s Financial Times highlights a news-worthy development that has somehow gone largely under the radar, namely, that the one reasonably well functioning US cap and trade regime has come under a legal cloud, not only to detriment of the market, but also to pollution emissions.

The legal beef is that the EPA exceeded its legal authority in implementing the cap and trade program for power plans emissions of sulphur dioxide and nitrous oxide, aka Sox and Nox. Now we have not been as keen about cap and trade as other have been. For large companies to plan and make investments, price certainty is far more beneficial, and taxes are a better way to achieve that. Even a conservative true believers like Greg Mankiw (and the more centrist Financial Times editorial opinion) prefers taxes to cap and trade, which lead to variable prices of the right to produce the problematic substance. But in the US taxes = bad, while cap and trade sounds more palatable.

Having said that in general, the power plant regime appears to have been well designed and was producing the desired behavior prior to the recent tsuris.

While cap and trade is better than no regime at all, the flip side is that the uncertainty created by the courts may work to the detriment of future cap and trade programs. In this case, rulings that would have forced the program to be tougher in some respects have wreaked havoc with the market, certainly not an intended outcome. Prices for emission rights have plunged, leaving investors in them with considerable losses and producing higher levels of emissions. From the Financial Times:

While the Administration and most of the Congressional leadership have been pouring their attention and political capital into cobbling together a coalition to support a carbon cap and trade mechanism, the one existing such system for air pollution has been coming undone.

For the past several years, the Environmental Protection Administration has operated a market in “allowances” for power plants to emit.

Over time, the way the regulations were set up under the Clean Air Interstate Rule, or Cair, utilities have had to spend progressively more money to buy emission allowances. That has given them an incentive to install scrubbing devices for their smokestacks. If they installed the devices more quickly than required by law, they could sell the extra allowances to other emitters.

So it was profitable to clean up. The industry estimates up to $75bn (£47bn, €53bn) of Sox and Nox controls were built early due to the Cair regulations.

Last July, however, a US Federal appeals court in Washington ruled the Cair regulations gave the EPA more authority than Congress had authorised, while failing to address problems of specific states that are downwind of large Sox and Nox emitters. So it ordered the EPA to try and fix Cair, while setting conditions for doing so that are impossible to meet without the authority of new legislation.

The alternative to a Cair fix by next year would be the zero-ing out of the Sox and Nox markets, and the imposition of an administrative command and control system.

The appeals court ruling had a perverse effect. By ruling that Cair did not do an adequate job, or one justified by the Clean Air Act, the court crashed the Sox cap and trade market, and did considerable damage to the Nox market. Before the court’s decision, Sox allowances traded around $600 to $800 a ton. Now, depressed by the utilities’ and traders’ belief that EPA cannot devise a fix, Sox allowances go for about $60 a ton, creating tens of billions in losses.

It is cheaper to buy allowances from devalued existing stock, and emit more acid-rain-causing SO2, than to build new scrubbers or even operate existing equipment.

As one utility lawyer in Washington told me: “I know of utilities that are buying cheaper, high sulphur coal, or running their scrubbers at a less intense rate. I am absolutely certain that SO2 emissions will increase next year as well.”

The EPA’s studies estimate that the crash of the Cair markets will lead to an extra 35,000 deaths over the next couple of years.

You would think this would raise a huge hue and cry, more than a jet crash, though perhaps not as much as a televised amateur talent show. You would be wrong.

The most scarce resource in the political class is attention span, and it seems only one air issue can be dealt with at a given time. This year, it’s carbon dioxide…

Mr [Thomas] Carper [Senator from Delaware] intends to submit a law to replace the Cair regulations, called “3P”, for the three pollutants of sulphur dioxide, nitrous oxides, and mercury….

The provisions would probably be attached to either a climate bill, which faces long odds, or an omnibus energy bill.

One of the Federal court’s main objections, that the EPA exceeded its authority, would be dealt with by imposing rules by law rather than regulation. The other, that downwind states would not have protection from specific emitting plants, could be mitigated by lowering pollution limits very rapidly.

According to Mr Carper: “The EPA agrees on the need for a legislative fix, and they will be our partners on this.”

There is another point that seems to have escaped some of the political leadership. How could industrialists or traders have faith in, or commit capital to, a future carbon cap and trade system if a similar system is allowed to collapse through inaction?

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10 comments

  1. selise

    re: "in the US taxes = bad, while cap and trade sounds more palatable. "

    james hansen (NASA) has been advocating a carbon tax and 100% dividend (he says cap and trade won't work). from his short and very informative statement before the house ways and means committee february:

    "For example, a carbon price equivalent to $1/gallon of gasoline (about $115 per ton of CO2), for 2007 rates of fossil fuel use in the United States, generates $670B. If we give one share to each legal resident age 22 and over, one half-share to college age youth (18-21), one half-share to the parents of each child up to two children per family, that yields about 224 million shares in 2007 (this could be off by ~10%; I could not find optimum census data). So the 100% Dividend for a $1/gallon tax rate ($115 per ton of CO2) is:

    Single share: $3000/year ($250 per month, deposited monthly in bank account)

    Family with 2 children: $9000/year ($750 per month, deposited monthly in bank account)

    The tax rate and dividend should increase with time.[4] This approach would reduce demand for fossil fuels, driving down the price of fossil fuels on the open market. The next time the price of gasoline reaches $4/gallon most of that $4 should be tax, with 100% of that tax returned to the public as dividend. Instead of our money going to the Middle East and other foreign places, most of it would stay at home.[5]

    This tax, and the knowledge that it would continue to increase in the future, would spur innovations in energy efficiency and carbon-free energy sources. The dividend would put money in the hands of the public, allowing them to purchase vehicles and other products that reduce their carbon footprint and thus their taxes."

    this might be palatable to the public, but not i expect to the fossil fuel industries or those who would like to make money trading pollution rights, carbon credits, etc.

  2. autodidact

    Yep, and Hansen is one of the most rabid supporters of reduction in CO2. He once even compared trains that carry coal to the "trains of death" that carried Jews to Auschwitz.

    I'm all in favor of regulating pollution. There are limits to what the planet can detoxify. However, CO2 is not pollution, and mankind emits only a small fraction of the CO2 put into the atmosphere annually. Most of it is of natural origin. I can't recall the exact percentage of human contribution. I believe it was not more than 3%. In other words, if all humans stopped all carbon emissions, nature would still supply new atmospheric CO2 about thirty times greater than human-caused emissions. Unfortunately, we cannot tax nature. It would be nice, though.

  3. sharonapple88

    Humans contribute to a small percent of the CO2 being produced on earth, but the CO2 produced by human activity appears to be boosting the amount of CO2 in the atmosphere.

    From the New Scientist article: About 40% of the extra CO2 entering the atmosphere due to human activity is being absorbed by natural carbon sinks, mostly by the oceans. The rest is boosting levels of CO2 in the atmosphere.

    How can we be sure that human emissions are responsible for the rising CO2 in the atmosphere? There are several lines of evidence. Fossil fuels were formed millions of years ago. They therefore contain virtually no carbon-14, because this unstable carbon isotope, formed when cosmic rays hit the atmosphere, has a half-life of around 6000 years. So a dropping concentration of carbon-14 can be explained by the burning of fossil fuels.

    More on carbon isotopes here.

  4. "DoctoRx"

    Yves:

    Congrats on an important post. The final thought is tres importante.

    And love the Yiddish!

  5. Dave Narby

    Carbon is a lagging indicator when compared to global temperatures.

    If you want a good laugh, read the "explanations" of why carbon is a lagging indicator, but still responsible for warming. Also useful if your AC breaks down, as the handwaving results in substantial dermal evaporative cooling.

    The central premise of AGW is false on it's face.

  6. DownSouth

    Yves said: "But in the US taxes = bad, while cap and trade sounds more palatable."

    Libertarian fundamentalism, Christian fundamentalism and Militarism, these are the ideologies promoted by America's ruling coalition which is formed by the security-industrial complex (which includes the energy and military sectors), the financial-industrial complex and the evangelical Christian-industrial complex.

    Yves provides us with an example of how libertarian fundamentalism and one of its canons–anti-tax dogmatism–bears indirect fruit for the energy sector (coal, oil and natural gas producers). But besides libertarian fundamentalism the energy sector is also an indirect beneficiary of Christian fundamentalism and one of its core tenets, that of anti-science.

    What continues to puzzle me, however, is what does the Christian-industrial complex receive from this coalition? This is an extremely important question, because evangelical Christians, being the most populous part, are by far the most powerful part of this ruling triumvirate.

    While the preachers that promote Christian fundamentalism have become extremely wealthy, I don't think this explains it all. And if money doesn't explain it, that begs the question: What is the idological thread that runs through libertarian fundamentalism, Christian fundamentalism and militarism that tie them them all together? Andrew Bacevich and Kevin Phillips identified the triumvirate, but don't delve much into the doctrinal affinities that bind them together. Greg Grandin does a much better job of looking at the theology of the Christian fundamentalists, identifying some of the leading lights and citing specific examples of their theology. But alas, he's no theologian.

    I think it may be Reinhold Niebuhr that can provide the insight to pull it all together. I have noted before that he was loath to cast aspersions upon his fellow religionists. However, last night I began reading his book The Nature and Destiny of Man. And in it he indeed does talk about how "Christian individuality may become the source of anarchy."

    I must admit that Niebuhr shoots over my head. I don't have a background in classical or Western philosophy, nor Jewish or Christian theology, to fully appreciate or understand his writings. However the gist of it is this: It is the worship of the individual, and the development of the doctrine of the "autonomous individual," that threatens to be our undoing. The "autonomous individual" is the result of a malignant synthesis of elements deriving from (a) post-Renaissance(modern) Occidental thought and (b) ancient Judeo-
    Christian thought.

    The thing that libertarian fundamentalism and Christian fundamentalism therefore have in common, the thread that binds them together in the current coalition, is this worship of the self: the celebration of the "autonomous individual."

    The impulse towards militarism (nationalism) happens when the credo of self-worship breaks down, as Niebuhr argues it always must:

    An individual cannot bear to make himself the centre of meaning without qualification. Inevitably he must seek support from something greater and more inclusive than himself…

    Sooner or later [he] must…recoil from the pretension of this purely individual self-deification; and all but Nietzsche do recoil. They seek to increase the plausibility and reduce the prentension of this self-glorification by looking for the "larger individual"; which they find in the unique nation. This collective individual then supplants the single individual as the centre of existence and the source of meaning.

  7. JR

    Hi DownSouth,

    "Yves provides us with an example of how libertarian fundamentalism and one of its canons–anti-tax dogmatism–bears indirect fruit for the energy sector (coal, oil and natural gas producers)."

    What is libertarian fundamentalism you speak of?

    The republican party is not libertarians, and the coal, oil and natural gas producers are certainly not fans of libertarians (at least the majority austro-libertarians).

  8. kackermann

    @autodidact, don't forget that we have already been through this once before.

    We had to switch over from using CFC's that were depleting the ozone layer.

    CO2 is not pollution per se. What it has is an absorption spectum that is transparent to visible light, but opaque to infrared energy.

    The earth has to re-radiate the same amount of energy that it receives, and it does a great deal of this in the IR band. You can tell because rocks heat up in the day and cool at night.

    Water vapor is even more opaque to IR, but water vapor participates in evaporation/precipitation. CO2 does not precipitate and hence, holds heat more than the gasses it displaced as a percentage of the atmosphere.

    A few percent may not sound like a lot, but it is sustained. The earth will reach a new equalibrium with the additional CO2, but the question is if it does so by generally heating up.

    I'm not willing to stop there. There may be other higher-frequency escape routes for the additional energy. One way that I thought of was if the extra energy produced more frequent, massive, and violent storms, then the additional lightning would indeed be a high energy escape, but I don't know how much makes it to space.

    Denying science is not a good way to assess real risk. You should take a look at the mechanisms involved.

  9. skippy

    @kackerman…said, One way that I thought of was if the extra energy produced more frequent, massive, and violent storms, then the additional lightning would indeed be a high energy escape, but I don't know how much makes it to space.

    Here is a brief video, sorry its hard to condense information in this format (comments), but may enable you to further searches to gardener expanded perspectives.

    @downsouth,

    You do like getting to the root of things, what are the evangelical puritans up to you ask.

    In this limited forum I would say simply to see their self fulfilling prophecy. It's the Lynch pin in the in the 3 tribes of Abraham, second coming for two of them and first for one. To achieve this goal requires power and they will always gravitate to any form of power which enables them to achieve it.

    Your references to the club of "I" is really the key to many of our problems confronting us today. I have spent endless hours going down the same road as you to find these answers, since I was born of its world, but fell out at a young age, did not pass the smell test.

    I would be happy to carry on this conversation with you if means could be established to your liking.

    skippy…bloody fertile crescent hatched many a bad egg or are they fragments of each other.

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