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“Cap and Trade” System for Large Emitters

Working within the Western Climate Initiative

BC is participating with Manitoba and seven US states (Arizona, California, New Mexico, Oregon, Washington, Utah and Montana) in the Western Climate Initiative (WCI), to implement a market-based, multi-sector “cap and trade” system to reduce GHG emissions. Design of the system is underway and scheduled for completion by August 2008.

How a “Cap and-Trade” System Works

Under cap-and-trade, hard “caps” are placed on the quantity of GHGs that can be produced by major emitters covered by the system. The overall cap is reduced over time in line with emissions reduction targets. The total number of allowances within the system corresponds to the overall cap; for the WCI, each allowance will be a permit to emit one tonne of carbon dioxide equivalent (CO2-equivalent). Each regulated entity must hold enough allowances to cover all of its regulated emissions in each compliance period. Initial allowances are issued either through free allocation or by auction, or some combination of both.

The main characteristics of a cap and trade system are as follows:

  • A cap puts a ceiling on total emissions. The cap provides an environmental advantage over traditional regulatory methods for individual emitters, which do not prevent aggregate emissions from rising as new sources are created.
  • Limiting the number of available emission allowances reinforces the cap. Scarcity of allowances ensures that a “price” is placed on pollution, and thus provides the incentive to reduce emissions.
  • Covered entities may choose from many options to meet their emission reduction targets, adopting those which are the most cost-effective and best meet their needs. They may reduce their own emissions using new technologies or other means, buy unused allowances from other covered entities that have reduced their emissions, potentially purchase offset credits from outside the system, or use a combination of all of these.
  • Covered entities can bank unused allowances for future use, which creates a tangible economic incentive to decrease emissions below allowable levels. Early emissions reductions also result in earlier environmental benefits.

Advantage of a Multi-Jurisdictional Cap and Trade System

The main advantage of BC participating in a WCI-wide cap-and-trade system rather than developing a system of its own is that the larger market provides more opportunities for low-cost emissions reduction solutions. WCI members now have a population of 63 million people, significantly more than the population of Canada, and is likely to grow. Participating in this larger market also helps ensure that BC businesses face the same policies as their competitors in other WCI jurisdictions.

GHG emissions trading is a growing phenomenon worldwide. Systems with varying degrees of sectoral coverage are underway or in the process of being developed in several regions and countries, including the North Eastern US States, New Zealand, Australia, Japan, Norway, Switzerland and the European Union. It is possible that eventually linkages could be made to other GHG emissions trading systems outside of the WCI region.

The US Acid Rain Program: A Successful Example of Cap-and-Trade

Using cap and trade to reduce other types of emissions has been successfully demonstrated in North America. The United States Environmental Protection Agency’s (EPA) Acid Rain Program is the most prominent example. The program sets a nationwide cap on sulphur dioxide (SO2) emissions from fossil fuel combustion electric-generating facilities under the US Clean Air Act.

The EPA outlines the same benefits of the program as noted above1, and adds that emissions allowance trading leads to a reduction in overall compliance costs compared to meeting the same target emissions level through “command-and-control” regulatory means.

As shown in the chart, by 2006, SO2 emissions in the US have been reduced by 7.9 million tons under the program compared to 1980 levels — over a 45 per cent reduction. The program also sets nitrogen oxide (NOX) emission limitations for coal-fired plants with some compliance flexibility, and has resulted in a 42 per cent reduction from 1990 levels.

Chart.


1  Source: US EPA. 2002. Clearing the Air: The Facts About Capping and Trading Emissions. Accessible at http://www.epa.gov/airmarkets/progsregs/arp/docs/clearingtheair.pdf.

 

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