NCPA - National Center for Policy Analysis

Would Emissions Trading Lower Costs Of Kyoto Agreement?

March 14, 1998

Emissions permit trading is frequently cited as a "costless" way to reduce carbon dioxide (CO2) emissions under international agreements on global climate change. Under such a program, the government would specify a target level of emissions; companies would be given permits to emit CO2 based on historical output; and they could sell any unused permits to other producers.

The Environmental Protection Agency claims a similar program for sulfur dioxide (SO2) reduced emissions of the acid rain-causing gas at a fraction of the original cost estimate. The SO2 permits were given to electric utilities required to reduce emissions from high sulfur coal.

  • The EPA originally estimated the marginal cost of abatement for SO2 at $1,500 a ton, and expected the allowances to trade for about half that amount.
  • It also annually auctioned new allowances -- which brought only $122 to $140 a ton in 1995 and fell to $70 a ton in 1996.
  • The number of trades was also surprisingly low, with only 2.3 million tons worth of allowances traded in 1995.

The low price for permits suggests a lower cost for abatement -- but several factors unrelated to the trading system may explain it:

  • The switch by many utilities to low-sulfur coal -- encouraged by a big drop in its price.
  • Lower shipping costs for western low-sulfur coal due to railroad deregulation.
  • And stiffer competition in the coal, natural gas and scrubber industries, which spurred conversion to other fuels and lowered the cost of new technology.

Reductions in emissions using permit trading still means raising the cost of energy, say analysts. And due to the large number of CO2 emissions sources, elaborate rules and a large bureaucracy to monitor the program will be necessary.

Source: Barbara Rippel, "Tradable CO2 Emissions Permits: Problems with the 'Perfect' Solution?" Consumer Alert Issue Brief, November 25, 1997, Consumer Alert, 1001 Connecticut Avenue, N.W., Suite 1128, Washington, D.C. 20036.


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