Sulfur Dioxide Emission Trading System in US - Research Paper Example

US Sulfur Dioxide (SO2) Emission Trading System In a very short time, the period of effectivity for the compliance restrictions binding the participants of the Kyoto Protocol ends. While the United States did not ratify its conformity with the accord, it has taken big steps to protect the environment, particularly on sulfur dioxide. The US pioneered the market-based approach of trading sulfur dioxide emission allowances and has established partnerships with other countries who are interested in adopting the system. Critics are, however divided on the wisdom of tradable emission scheme in realizing the objectives of reduction and control of sulfur deposition. This paper presents an in-depth analysis of the emission trading system in the US. The main points of the discussion include: a look at the sulfur dioxide problem, the historical and regional context of sulfur dioxide emission trading, pertinent policies, a cost-benefit analysis and an assessment of the efficacy of emissions trading. At various points in the exposition, comparative analogy is made with neighboring country, Canada and with emerging sulfur threat China. The Sulfur Dioxide (SO2) Problem It is both well publicized and generally accepted worldwide that air pollution results in health problems. One of the consequences of degradation of air quality is acid deposition within areas where discharges of sulfur dioxide (SO2) and oxides of nitrogen (NO2 and NO31) are generated (McKenzie, Pinger and Edward 464). Sulfur dioxide emissions originate from several sources. The major emitters of SO2 and NOx are stationary fuel combustion, industrial processes, transportation and other wastes. Emissions coming from the burning of fossil fuels2 react with water vapor in the earth’s atmosphere to produce sulfuric and nitric acids (Rohr 1; McKenzie, Pinger and Edward 464). Reactions between sulfur dioxide and other particles or substances in the air have various effect on health and the environment (Environmental Protection Agency [EPA] par. 1) Sulfur oxides are known to be harmful to humans, plants and materials from research-based evidence compiled from toxicological, human clinical and epidemiological studies (Rohr 1). At very high concentrations sulfur dioxide adversely affects the upper respiratory system of humans by causing the natural breathing process to be more difficult, and in extreme cases, premature death occurs because of the breathing difficulty. This happens because sulfur dioxide constricts the finer air tubes of the lungs. (Socha par. 10; EPA par. 1, ). In this respect, people who are afflicted with asthma, heart or lung disease are sensitive to sulfur dioxide and its derivatives from the air, especially if they are active outdoors. The children and the elderly are also sensitive to air contaminated with sulfur oxides (EPA par. 1, 2; Rohr 1). Moreover, high levels of longer-term exposure to SO2 gas and particles can also trigger respiratory ailments, and worst, exacerbate existing heart problems. (EPA par. 2). In the second half of 2007, power plants and factories in the US contribute 90-95% of SO2, and approximately 57% of NOx emissions. More than half of SO2 emissions are discharged to the air from high smoke stakes, which are conveyed either by the wind or by gravity over long distances. This process of natural transport result in the development of secondary pollutants such as nitrogen oxide, vapors of nitric acid and droplets containing a combination of sulfuric acid, sulfates and nitrate salts. Sulfur dioxide and its derivatives fall to the surface of the earth in any of three states3 as acid rain (Socha par. 10). The rate of oxidation from sulfur dioxide to particulate matter ranges from 0.5 to 2% in an hours. Meanwhile, particulate sulfate in the ambient atmosphere lasts from 2 days to one week. Based on its form, acid rain is variously called as acid snow, acid dew, acid drizzle, acid fog and acid sleet (McKenzie, Pinger and Edward 464; Socha par. 10; Rohr 1). To date, power plants running on fossil fuels still constitute one of the main sources of SO2 emissions of approximately 66%, while industry and transportation contribute 29 and 5% of the sulfur emissions. Emerging development, however, revealed that shipping and port activities may also be significant generators of sulfur dioxide in specific areas of the country (Rohr 1). As per National Ambient Air Quality Standards (NAAQS), sulfur dioxide is one of seven air quality pollutants being monitored by the EPA. To date, a yearly average of 0.03 parts per million (ppm) is the primary standard for SO2. There is also 24-hour average of 0.14 ppm which should not be surpassed more than once each year (Rohr 1). Historical and Regional Context of SO2 Emission Trading As the perils of climate change became more prominently recognized during the final decade of the twentieth century, the international community endeavored to deal with the problem. Amidst opposing stands on the necessity of what was then considered as drastic reactions to address the growing concern for environmental awareness, the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol were born. In spite of a difference in opinions regarding for the two initiatives, there was, however, at least a general consensus from the scientific perspective as to role of mankind in the radical changes observed on the earth’s climate. The UNFCCC and the Kyoto Protocol were then believed to be the solution for the control of the most significant greenhouse gases (GHG) and two other groups of gases. The four GHGs are carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, while the two groups of gases are chlorofluorocarbons and perflourocarbons. Under the terms of the Kyoto Protocol, the mean yearly discharge of GHGs in industrialized countries listed in Annex B need to be maintained below designated goals during the first compliance period from 2008 – 2012. For purposes of comparison, U. S has a limit of 7%, while Canada has a limit of 6%. The International Emissions Trading (IET), together with the Clean Development Mechanism (CDM) and the Joint Implementation (JI) are three mechanisms of the Kyoto Protocol designed to encourage compliance among other countries with lower financial outlays. For instance countries which are not classified as Annex B may earn and trade emission credits through the CDM. Again, for purposes of comparison, the United States is a signatory to the Kyoto Protocol, but has not yet ratified its participation in the accord because of its misgiving about a global effort with unequal outlays between industrialized and developing countries. Meanwhile, Canada signed the framework and the protocol 1992 and 1997 respectively, and ratified the Kyoto Protocol in late 2002 (“The International” par.1; UNFCC 2, 7). Prior to 1997, the success of US efforts to address the problem on air pollution had not been doing very well. The Joint Economic Committee of the US Congress believed that anti-air pollution initiatives were partly hindered by some provisions in the Clean Air Act. Particularly, stipulations in the Act where the government prescribes the best technological solution to air pollution problems and sets a common emission limit across all power plants irrespective of size was a primary stumbling block of the legislation (Bryan 2). The original version of the Clean Air Act in 1970 is a broad federal legislation which deals with the control of air emissions for both stationary and mobile sources. It mandated the EPA to prescribe the National Ambient Air Qaulity Standards (NAAQS) to safeguard public health and manage the procedures for the control of the release of toxic impurities in the air. (“Clean Air” par. 1) The solution proposed for sulfur dioxide emissions in power plants utilizing fossil fuel was to raise the standards for new power plants instead of requiring more expensive modifications for existing facilities. With the higher standards in place, existing power plants were kept beyond their useful economic life rather than constructing new plants with the new standard anti-emission facilities. This resulted to the inability of these plants and the government authorities to realize their objectives pertaining to the reduction of sulfur dioxide discharge (Bryan 2). Meanwhile, continental neighbor Canada, applied the research process and economic modeling techniques in forecasting the most probable amount of GHG emissions in the country should no intervention be attempted to minimize or reverse the effects climate change, which was dubbed as the “2010 business-as-usual (BAU) projections” (BAU). Based on the BAU forecast, emission will reach 809 metric tons (mt) in 2010. Based on the Kyoto limits and the BAU projection, Canada estimated that its emission should be reduced in 2010 by 240 mt, which was christened as the “Kyoto gap” (“The International” par.8). Based on an analysis of worldwide depositions of sulfur from two centuries of data, Prof. Rudolf Husar found out that Europe, US and the former USSR managed to stabilize their sulfur emissions during the period fro 1979-1999. On the other side of the world, however, the People’s Republic of China registered skyrocketing increase in sulfur emissions. Mainland China has earned for itself the unenviable sobriquet of being the biggest producer of toxic sulfur dioxide emissions (Washington University par. 2, 4). Comparatively, as the last decade of the 20th century began, US and Canada combined were discharging some 15 million metric tons of sulfur, while China alone was emitting roughly 22 million metric tons. (Washington University par. 14, 16). From the hindsight, the peak of industrialization in North America from the 1970s to the 1980s also saw the rise of sulfur emissions in smoke stakes over the Western atmosphere. With relatively cleaner skies now, it seems rather vague to celebrate the achievement of the past efforts. The sulfur-laden clouds just wandered off to the other side, which augurs a shift of focus from North America to Asia. As the new millennium dawned, the scourge of acid rain has not really been neutralized, and has “just gone somewhere else” (Washington University par. 16). Indeed, as satirized by the witty quip from an unnamed Chinese government official that “pollution needs no visa” the acid rain clouds are hovering over the East. As swift as its unprecedented growth, China’s economic momentum has to be tempered with initiatives to reduce the price that has to be borne for industrialization – acid rain. The Chinese government manifests an earnest desire to deal with its pollution burden by the imposition of a policy to minimize emissions of sulfur dioxide by 10% in 2005. It was generally believed, however, that the policy suffers from a paucity of mechanisms to successfully administer the policy as envisioned. China sought financial and technical assistance to create the necessary mechanisms and put them in place. As of 2003, only the US and China have clearly articulated its limit on sulfur emission (Environment Defense Fund par. 2, 6). China’s adoption of an emissions trading scheme is anticipated as a positive commitment to concretize its cap on emission by tangible results. Pertinent Environment Policies “Command and control” approach vs. tradable allowances policy. From the 1940s until the 1990s, regulations pertaining to environment protection were drawn using the “command and control” approach. Under this methodology, the government specifies what it believes is the most optimal solution to pollution problems. Based on the original Clean Air Act stipulations, the government designates a level reduction in emissions which does not necessarily consider the variations in size of the power plant facilities, as well as in their adaptive capacity and the cost of reducing emissions. Restrictions on the emissions are enforced under the “command and control” approach with the imposition of monetary fines. (Bryan 2; Ludwig 1). Based on a 50-year experience, use of the command and control approach had resulted in: (1) depletion of resources; (2) higher price borne by the consumer; (3) unemployment an a corresponding decrease in economic growth rate. (Bryan 5, 6; Takezawa, et al 137; Ludwig 1) With the amendments to the Clean Air Act in 1990, the tradable allowances policy was set in place, among others. One of the many goals of the aforementioned amendment was to decrease the discharge of sulfur dioxide from power generation plants in the year 2000 by 8.5 million tons below the 1980 levels. Under the program for trading SO2 emissions as stipulated in the amendments, initial allocations of allowable SO2 emissions were appropriated for plants whose sizes fall above a designated category. Initial allocations were based on historical patterns per category. The given allowance permits plants to emit one ton of allowable SO2 within the year the allocation is given or in the following years. A surplus is registered when emission levels fall below the initial allocation. Plants which generations surpluses are permitted to sell these allowances to other plants who are struggling to keep their emissions within the allocation. The regulation does not designate a specific method to keep reductions within limit. Stipulations only require that the plants maintain enough allowances to cover the volume of its emissions SO2 (Bryan 3). The following advantages have been noted about the tradable allowances policy: (1) decrease in the overall cost of compliance; (2) flexibility in the choice of measures to control and minimize of SO2 discharges; (3) decrease in the cost of emission reductions (Bryan 3, 6, 7). US Regulations. The United States has a substantial compilation of regulations pertaining to the protection of the environment. The first in the list is the Clean Air Act and its amendments in 1990, which have been discussed articulated in the preceding sections. Provisions pertaining to the trading of emissions is included under the 1990 amendments of the Act. Specifically Section 7651f included under Subchapter IV-A of Chapter 85 in Title 42 of the US Code of Regulations details the sulfur dioxide allowance for existing and new units. Provisions provided clear stipulations for the allocations of annual allowances for existing and new facilities, the system of transfer of allowances, inter-pollutant trading, allowance tracking system, new utility units, nature of the allowances, prohibitions, competitive bidding for power supply, applicability of anti-trust laws, etc (Cornell University Law School par. 1-10). Title 40 of the Code of Federal Regulations (40 CFR) contains sections of pertaining to environment protection. In Chapter I of this regulation, the US Environmental Protection Agency (EPA) is mandated to manage the systematic protection of the environment by minimizing and controlling pollution. Chapter IV (Part 1400) deals with accident release prevention requirements and risk management programs under the clean Air Act which is jointly under the sphere of the EPA and the Department of Justice (DOJ). Parts 1500 to 1518 of Chapter V elucidates on the Council on Environmental Quality. Finally, Part 1700 of Chapter VII tackles uniform national discharge standards for vessels of the armed forces, also involving EPA and the DOJ (EPA par. 3-7). Regulations in Canada. Canada has created a number of actions plans for the reduction of greenhouse gases since the year 1992. The federal government implemented one of its most recent and significant initiatives in 2002 with the Climate Change Plan for Canada (CCPC) which details procedures and goals for different sectors. The CCPC aims to reduce sulfur emissions by 180 mt. Based on the BAU projections, only 60 mt of the Kyoto gap of 240 mt, therefore, needs to be taken care of by Canada’s succeeding plans regarding climate change. Regulations in China. The Chinese State Environmental Protection (SEPA) initiated a policy of total emission control (TEC) as part of the country’s Ninth Five-Year Plan Period from 1996-2000. After national sulfur dioxide targets were established, individual control goals were assigned to autonomous regions, municipalities and provinces by the SEPA. Likewise, TEC targets were also assigned to local governments and identified emission sources by the respective regional governments (Wang, Yang, Ge, Cao and Schreifels 4). Cost-Benefit Analysis From a general perspective, mankind and the ecosystem stand to significantly benefit from the reduction and eventual control of sulfur dioxide discharges in the atmosphere. These benefits were summarized in the last column of Figure 1 by Director Peter F. Guerrero in a report to the US Congress from the General Accounting Office (Guerrero 26). Figure 1. Effect of Acid Rain on Human Health and Selected Ecosystems and Anticipated Recovery Benefits. Based on the benefits shown in Figure 1, there is every reason to doubt the efficacy of traditional cost-benefit analysis in painting the real and actual scenario of how much it costs to reduce and control toxic emissions and what is the most realistic cost for the benefits as shown above. It is, indeed, impossible to stamp at price on the clarity with which a beautiful scenery can be viewed at a longer distance as one of the benefits of wiping out sulfur dioxide from the environment. As repeatedly underscored by Amory Lovins (qtd. in Lipow par. 20), to anchor decisions which involve the continued existence of living things on the planet, there is a “need to count all cost, and all benefits … [and decisions have to based on] the net, not the gross.” Lipow believes that if analyses are based on net costs, emission trading will generate lower costs than conventional approaches and that the ratio of cost to benefit could be “worse in every case” (par. 20) On his end, Driesen believes that use of whatever model of cost-benefit analysis (CBA) is used in evaluating the efficacy of trading emissions, an accurate picture of the most relevant issues at hand can not be objectively rendered. In the first place, the valuation involved in carrying out a cost-benefit analysis is anchored on assumptions. In place of CBA, which is believed to be static, Driesen is pushing for an economic-dynamic approach (504). At any rate, emissions trading, according to Driesen, lessens the cost of using the conventional approaches to reduce sulfur pollution but at the same time discourages the will to innovate. Furthermore, emissions trading only offers a less costly method to comply with regulatory standards, but this may not be equivocated to it being the most environmentally sound and efficient option to reduce sulfur dioxide emissions (518). A number of research studies undertaken by economic experts using the cost-benefit analysis regarding the efficiency of trading emissions in reducing emission deposition revealed varied conclusions. The results of the research investigation conducted by Carlson, Burtraw, Cropper, and Palmer to evaluate whether or not the reduction of costs of reducing sulfur dioxide emissions resulted from allowance trading tend to sway towards a negative conclusion. It was observed that since 1985, drop in the costs of abating sulfur dioxide in the atmosphere was brought about by the use of coal with low sulfur-content, changes in technical procedure and lower coal prices resulted to the lowering of sulfur emission reduction expenditures by more than 50%. Moreover, a comparison of the potential cost savings in 1995 and 1996 vis a vis actual costs implied that the goals set with the trading system were not achieved (1292). Cost-benefit-analysis in this case tend to generate valid conclusions because the benefit parameters are actual costs. Analyzed from another viewpoint by an expert who handles consultancy projects on coal and emissions, among others, maintained that the 2008 price of SO2 allowances lower the generating costs for electricity, but also lowers the revenues for coal suppliers. This analysis follows a cause-and-effect pattern, which suggests that not all sectors benefit from the trading scheme from the financial angle (Shewski par. 1-4). Assessment of the Efficacy of SO2 Emission Trading Based on currents standards, none of the US monitoring stations have reported emissions exceeding these standards as of February 2009. There was a 48% reduction in the mean annual ambient concentration of sulfur dioxide in the using from 1990-2005. The highest annual and 24-hour average of SO2 emissions from 2003-2005 were 0.015 ppm and 0.146 ppm , respectively. It was also observed that the concentration of SO2 in the atmosphere tends to differ by season, and that the distribution of SO2 in the atmosphere is more likely to be concentrated and trailing from a specific source, rather than homogeneous. Review of the standards for ambient SO2 concentrations is currently underway (Rohr 1). It can not, however, be concluded beyond the shadow of a doubt that sulfur dioxide emission trading is the ultimate panacea to the pollution problem based on the findings of the study by Carlson, Burtraw, Cropper, and Palmer (1292) and a more recent study by Taylor, Rubin and Hounshell that the majority of the performance and capital cost improvements in the dominant technology occurred before the amendments of the Clean Air Act (where emissions trading was introduced) in 1990 (372). While the provision of less costly options to reduce emissions encourage industries to cooperate in the global initiative against climate change, the politics involved in orchestrating the system and the decisions pertaining to how the allowances are allocated are stumbling blocks. Experts do not believe that SO2 emission trading is the definitive solution to rally the nations of the world together to act cooperatively in defense of the earth (Wilder, Vis and James par. 16). And as long as sulfur dioxide emission trading is resorted to by participants as a means to cut costs and not as a defense against the effects of global warming and climate change, innovation will continuously stagnate. Reducing emissions is just but a first step. It should not be the last. As the threat to a possible extinction of humanity looms, the world needs to look beyond economics and capitalism. Industries ought to sustain, not decimate mankind! References Bryan, Hayden. Chair. Tradable Emissions. Washington, DC: . Joint Economic Committee, United States Congress, 1997. Carlson, Curtis, Dallas Burtraw, Maureen Cropper and Karen L Palmer. “Sulfur Dioxide Control by Electric Utilities: What are the Gains from Trade?” Journal of Political Economy. 108.6 (2000): 1292-1326. “Clean Air Act.” Undated. Cornell University Law School. 13 June 2009. Cornell University Law School. “Section 7651b. Sulfur Dioxide Allowance Program for Existing and New Units.” Undated. Cornell University Web site. 14 June 2009 Driesen, David M. “The Economic Dynamics of Environmental Law: Cost-Benefit Analysis, Emissions Trading and Priority Setting.” 2003. Boston College Environmental Affairs Law Review. 15 June 2005. Environment Defense Fund. “China Commits to Reducing Air Pollution: Beijing Embraces Our Emissions Trading Strategy.” 23 May 2003. Environmental Protection Agency (EPA). “40 CFR: Protection of the Environment.” 24 April 2009. US EPA website. 15 June 2009 Environmental Protection Agency (EPA). “Sulfur Dioxide: Health and Environmental Impacts.” 26 May 2009. US EPA website. 14 June 2009 Environmental Protection Agency (EPA). “Summary of the Clean Air Act.” 24 April 2009. US EPA website. 15 June 2009 Guerrero, Peter F. Acid Rain: Emissions Trends and Effects in the Eastern United States. Washington, DC: United States General Accounting Office, 2000. Lipow, Gar. “Emissions Trading: A Mixed Record, with Plenty of Failures.” 19 February 2007. Grist Magazine, Inc. 15 June 2009. Ludwig, Lindsay C. “The US Acid Rain Program and its Effect on SO2 Emission Levels.” Issues in Political Economy. 13 (2004): 1-11. McKenzie, James F., Robert R. Pinger and Jerome Edward. An Introduction to community health. Sudbury, MA: Jones and Barlett Publishers, 2008. Rohr, A. “Health Effects of Sulfur Dioxide.” Issue Brief. February, 2009. Palo Alto, CA: Electric Power Research Institute. 14 June 2009 Shewski, Thomas. “Current Price of SO2 Allowances Lower Generating Costs ad Lower Coal suppliers’ Realized Prices.” 14 April 2008. Gerson Lehman Group. 15 June 2009 Socha, Tom. “Air Pollution Causes and Effects.” 11 September 2007. Health and Energy Web site. 13 June 2009 Takezawa, Sanzo and Nobuya Takezawa. “On the Market for Sulfur Dioxide Emission. Permits.” Annals of the College of Medical Care and Technology, Gunma University. 15 (1994): 137-144. Taylor, Margaret, Edward S. Rubin and David A. Hounshell. “Regulation as the Mother of Invention: The Case SO2 Control.” Law and Policy. 27.2 (2005): 348-378. “The International Context.” Quebecois Perspectives on the Canadian GHG Emissions Trading Systems. Undated. 14 June 2009 United Nations Framework for UNFCCC. “Kyoto Protocol Status of Ratification.” 10 July 2006. UNFCC web site. 15 June 2009 Wang, Jinnan, Jintian Yang, Chazong Ge, Dong Cao amd Jeremy Schreifels. “Sulfur Dioxide Emission Trading in China: Piloting Programs and its Perspectives.” 2003. 15 June 2009. Washington University. “China Now Leads World in Sulfur Emissions, Study Shows.” 25 November 1999. Science Daily. 15 June 2009 Wilder, Martin, Peter Vis and Chris James. “The Experts’ View: Emissions Trading as the Ultimate Panacea for Climate.” 2 May 2006. Allianz Web site. 15 June 2009 Read More