Energy / Regulation / U.S. Domestic Policy

Hats Off to the EPA: The Important Success of ‘Cap-and-Trade’

President Obama has made clear that in his second term he will make a concerted effort to raise national awareness of the problem of pollution and begin to structure federal activity to respond to the growing danger of climate change. Striking a defiant pose, the President used his State of the Union speech to make it clear to congressional Republicans that if they “won’t act soon to protect future generations, I will.” Despite the appearance of being the oracle of climate change revelation, the President’s administration must capitalize on this opportunity to draw important lessons from a vintage regulatory program closing in on 25 years of success.

With sulfur-dioxide (SO2) rates climbing dangerously, 1990 saw enactment of the first U.S. ‘Cap-and-Trade’ program pursuant to the Clean Air Act. This program, administered by the Environmental Protection Agency (EPA), sets upper limits for the emission of designated harmful pollutants with the innovation of allowing market participants to design their own strategies to meet these caps. The program assigns credits which a participant must surrender at the end of each period to account for its emissions. It allows, however, these entities the flexibility of trading their credits on the open-market, thus incentivizing unique private enterprise solutions that combine emissions credits with emission-lowering innovation and production.

The EPA is not often mentioned among the ranks of those federal agencies touted for smart, efficient regulatory activity. Despite this robust palate of initiatives, however, the Energy Information Administration (EIA) has released a new report which makes clear that the EPA’s Cap-and-Trade has been an extraordinary success.

The EIA report finds that emissions of SO2 have fallen to twenty year lows, significantly reducing the dangerous threat of acid rain that motivated the initial proposals. The EPA estimates that currently SO2 emissions are at 50% of their 1980 totals, making clear that, “EPA’s cap and trade programs have delivered significant environmental results.” Perhaps equally important, the free-fall of SO2 emissions has come faster than even the most optimistic analysts would have predicted.

The achievements of the Acid Rain Program (ARP) were not lost on President Obama who, during his first term, advocated for the expansion of the program but famously dealt Cap-and-Trade a near fatal blow by declaring, “Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket.”

The passage of time has shown this statement to be patently untrue. Despite an initial estimated burden of $6 billion, most current reports place the cost of the program closer to $2 billion. The result, according to the EPA, is a benefit-cost ratio that may be as high as 40:1. Simultaneously, Cap-and-Trade has achieved the highest successful return of human health benefits, $70 billion annually, of any federal regulation in the last decade.

The lesson of Cap-and-Trade is unmistakable. It is true that from 1990-2004 SO2 emissions from Coal-fired sources rose by 25%; however it is also true that total emissions fell 36% during the course of the program. Today the nation’s energy producers are stepping away from coal sources in record numbers, opting instead to cash in on the natural gas resurgence. This post does not discount the effect that this natural market movement has had on energy emissions, nor does it make the argument that Cap-and-Trade is solely responsible.

Rather, the lesson here is that by focusing on the result, the SO2 program granted the energy marketplace the necessary flexibility it needed to take advantage of the natural evolution of developments in the energy sector.

By opting not to dictate the strategy for how to comply, the ARP program managed to achieve incredible emission reductions at record pace, while permitting the nation’s energy producers to find innovative solutions that aligned favorably with their independent business models. These technological advancements may be moving this country permanently away from coal-fired emissions, yet in the end this progression has taken place naturally rather than at the mandate of a messy, costly regulatory apparatus.

The SO2 program is an example of an innovative, yet simplistic and efficient regulatory reaction to a complex problem. The resulting achievement must inform future debates on climate change if President Obama is serious about his pledge. The data is there; the administration need not conjure change out of thin air.

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