Wednesday, April 27, 2011


The cap and trade sytem used to reduce acid rain is often quoted as the justification of other ETS systems such as the Australian CPRS.  However, it is important to understand that there are important differences between the cap and trade used to drive down acid rain and some of the other cap and trade systems.
Firstly, the acid rain system was an offset credit cap and trade system. Wikapedia ( says: “As an incentive for reducing emissions, for each ton of sulfur dioxide reduced below the applicable emissions limit, owners of a generating unit received an emissions allowance they could use at another unit, keep for future use, or sell. This legitimized a market for sulfur dioxide emissions allowances, administered by the Chicago Board of Trade.[5] Units that installed flue gas desulfurization equipment (e.g., scrubbers) or other “qualifying Phase I technology” which reduced sulfur dioxide emissions by 90%, qualified for a two-year extension of the 1995 deadline, provided they owned allowances to cover their total actual emissions for each year of the extension period.” This system generates no revenue for governments.  It is worth noting too that this cap and trade was only part of a complex system that included substantial regulation.  (See link above for more detail.)
This is very different than some other programs, such as the CPRS, where governments SELL permits. These systems are defacto taxes. The price increases associated with this type of system have to be much higher because the price increases have to take account of the cost of the tax in addition to the actual cost of clean-up.
Secondly, there was always plenty of low sulfur coal available so the target could always be met. The cap and trade simply allowed various generators to use different strategies. It also encouraged generators installing scrubbers to scrub more then the minimum required to meet target for the sake of trade-able allowances.  The price of low sulphur coal would have had a stabilizing effect on the price of trade-able allowances
It is a bit more tricky where investment is required to meet targets. The value of trade-able allowances will vary enormously depending whether investors have over or under estimated future demand. Not desirable when investment in things like clean energy take years years to be paid back

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