Report: Regional Trading for Ozone Pollution a Model for Greenhouse Gas Markets

State-level action to reduce air pollution through emissions trading is working, according to a new report released by the World Resources Institute at the World Economic Forum.

DAVOS, Switzerland, Feb. 1, 2005 - State-level action to reduce air pollution through emissions trading is working, according to a new report released by the World Resources Institute at the World Economic Forum. This success may point to the future for greenhouse gas emissions controls in the United States and the effort to combat global warming.

Nine Northeast states and the District of Columbia set up a market for permits to emit nitrogen oxides (NOx), a gas that can lead to ozone pollution and a variety of health problems. The states worked through a regional Ozone Transport Commission (OTC) and launched the "OTC NOx Budget Program," which resulted in significant reductions of emissions.

The same steps and processes used to tackle NOx pollution could be used to reduce GHG emissions, the primary cause of global warming, according to the WRI report. "Greenhouse Gas Emissions Trading in U.S. States: Observations and Lessons from the OTC NOx Budget Program" claims that the example of successful NOx emissions trading at the state level is likely to bolster state efforts to take the lead with GHG emissions controls. The authors conclude that GHG caps set by states or regions are "critical first steps toward an evolving, global solution" and "send economic signals for innovation and investment in low-emission technologies."

As noted by Tony Blair at the start of the Davos economic summit, the European Union initiated a GHG emissions cap this year, which will help European countries to meet their commitments under the international Kyoto Protocol treaty on global warming, which the George W. Bush Administration rejects.

"With the Kyoto treaty coming into force in February, everyone is looking to see what the U.S. will do. Most of the action is at the state level," said Andrew Aulisi, coauthor of the report.


"The irony is that federal law drove the states to work together to deal with the NOx problem, but the absence of federal law on GHGs appears to be creating the same result. The states have shown that they can take the lead and serve as incubators for programs like emissions trading," Aulisi added.

In a "cap-and-trade" system, the government defines the total amount of pollution that regulated sources can emit over time, with the long-term goal of decreasing emissions. Under such a system, regulated firms have the options of reducing emissions or buying permits, called "allowances," from other firms. Companies with higher costs save money by buying allowances from firms with lower costs, and the firms with lower costs make money by reducing emissions and selling their excess allowances.

The WRI report notes that compliance was nearly perfect with the OTC NOx cap-and-trade program, and it appears that there was little if any displacement of emissions from the OTC-administered region to surrounding regions, a problem known as "leakage." In addition, the program had no discernable effect on economic vitality of the region, and the cost of reducing emissions was lower than the initial forecasts. The OTC program began in 1999 with nine states and the District of Columbia, but helped pave the way for a larger program that today covers nearly all of the eastern half of the United States.

"Once states and regions get started with emissions trading, an important question emerges about the expansion of those systems over time and their linkages to other trading programs," said Jonathan Pershing, coauthor of the report. "Northeast states are designing a cap-and-trade system, Northwest states are requiring new power plants to invest in emissions reductions, and Midwest states want incentives for projects that capture GHGs through improved agricultural practices. We will eventually need an integrated system that can bring all of those economic signals together."

The full report can be downloaded online.


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