Energy & Environment

Paper Trades and Real Emissions

Are market-driven approaches a regulatory charade that lets factories profit from polluting their neighborhoods?
by | November 2001

After the energy disruptions in California last spring, private markets have lost some of their luster as proficient instruments of public policy. So this is an appropriate time to clarify what economic mechanisms can and can't do to clean up the environment.

In the past decade, federal and state air-quality agencies began deploying market incentives to cut the cost of combating acid rain and smog. These programs use the profit motive to reward companies that curtail harmful emissions more efficiently and quickly than regulations require. That can add up to a good deal for everybody, but some anti-pollution activists regard market-driven approaches as a regulatory charade that lets factories profit from polluting their neighborhoods.

Around Baton Rouge, Louisiana, for instance, Tulane University law students have been successfully challenging the state's emission trading program for toxic compounds that petrochemical plants release to the air. Louisiana allows companies to bank or sell excess "offsets" if they hold volatile-organic-compound emissions below regulatory targets. The way the state has managed the program, however, "it's obvious that we've been getting paper offsets but real emissions," says Gary Miller, a chemical engineer who works with the Louisiana Environmental Action Network.

Last year, the U.S. Environmental Protection Agency agreed that Louisiana hadn't satisfactorily kept track of whether credits resulted from real reductions that surpassed levels factories were compelled to meet. In one case, EPA vetoed VOC offsets that Borden Chemical bought from Georgia Gulf; the agency found that the state should have counted Georgia Gulf's cutbacks as mandatory, not voluntary, because they're now actually required by tightened standards. Other states have had similar problems with VOC-offset trading. In the past few years, however, regulators have learned how to manage emissions trading more rigorously to guarantee real, not just paper, progress.

Since 1990, the federal acid rain program has been able to persuade power plants to shrink sulfur dioxide discharges more quickly than required, at a tenth of projected expense, by rewarding companies that figure out how to comply more economically than their competitors do. And, since 1994, 11 Northeast states have slashed smog-forming nitrogen oxide emissions in half while saving their industries a third or more of what they might otherwise have spent abiding by a conventional regulatory mandate.

Both programs rely on "cap-and-trade" mechanisms that set total pollution limits, divide them among states, then ratchet limits down over time to levels that officials conclude will be tolerable. Regulators assign each power plant or factory specific pollution- control goals, but then they let corporations that surpass these goals earn--and sell--credits for the extra emissions they've prevented.

Now Congress has begun considering "multi-pollutant" regulatory approaches that would blend the acid rain and smog trading programs with new emission curbs on toxic mercury and carbon dioxide, the prime culprit in global warming. Market incentives undoubtedly make sense for controlling emissions that travel long distances and across municipal, state and even national boundaries. Emissions that form smog or acid rain frequently degrade air quality hundreds of miles away, not just in the shadow of the smokestacks. Trading SO2 and NOx emissions to lower costs doesn't force people living in the neighborhoods closest to the source of pollution to bear most of the risk from region-wide pollution problems.

But volatile organics are a different matter. They contribute to smog, but they also bear toxic chemicals that are most dangerous to people whose homes are closest to emission sources. To make market mechanisms work, federal and state regulators need to reassure close- to-source neighborhoods that they'll also enforce tough pollutant controls plant by plant.

The Illinois Environmental Protection Agency, for instance, has gone to great lengths to make sure that the state's new VOC cap-and-trade program to curtail Chicago smog won't saddle poor neighborhoods with toxic hot spots. After one year of emission-credit trading, 180 sources had cut Chicago's overall VOC emissions 12 percent at a cost of roughly $760 per ton, compared to $6,000 per ton under a conventional regulatory program. But the agency kept neighborhood groups informed and has been surveying VOC levels throughout the region. It found that, at least after the first year that trading was under way, downtown industrial neighborhoods had lower concentrations than Chicago's western suburbs.

"We're doing this in the plain light of day, and trading is either going to cut the mustard or we'll do something else," says Roger Kanerva, Illinois' deputy environmental director. Politically, it is now not acceptable to forfeit some communities' health to make controlling pollution cheaper for others. But if governments apply them sensibly, market mechanisms can turn the profit motive to everybody's advantage.

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