Acid rain trading market dissolves

The poster child for emissions trading has now collapsed in a heap.

The US emission trading scheme in sulphur dioxide (SO2) — the gas that causes acid rain — is widely held as proof that the market can cut pollution.

Pro-market commentators point to the success of this “acid rain market” as evidence that similar kinds of carbon trading schemes are the best way to tackle climate change.

New York Times columnist Paul Krugman said on April 11 the scheme showed “that it is generally best to rely on a market-based approach”.

But this poster child for emissions trading has now collapsed in a heap.

The scheme was set up in 1990 under a series of amendments to the Clean Air Act. Power companies that emitted the toxic gas — mostly coal-fired power stations — were given permits to pollute, which could be traded to other companies.

In theory, the carbon price was supposed to give a financial incentive for business to cut SO2 emissions. Meanwhile, the permit trading would drive down the costs of making the cuts.

In late 2005, prices reached a high of US$1600 a tonne. But the July 12 Wall Street Journal said permit prices had plunged as low as $3 a tonne and could soon be worthless.

Part of the reason for the price collapse was that, although SO2 emissions had dropped, acid rain was still a problem.

As a result, new rules were issued by the US Environmental Protection Agency in early July. The new rules required each power plant to cut more SO2 emissions directly. Investors sold off SO2 permits in response, causing the price to drop.

US economist Donald Marron said in a July 12 post at that a further reason the permit prices had dropped so sharply was because in recent years, power companies had emitted less SO2 than they were allowed to.

From an ecological standpoint, this sounds good. But it meant the market was flooded with unused, surplus permits. This also caused permit prices to fall and thus reduced the incentive for companies to make more emissions cuts.

Now that the permits are almost worthless, the acid rain market works in reverse. Polluting corporations have a financial incentive to spew more sulphur into the sky.

Marron said the low permit price meant “utilities have essentially no incentive to avoid sulfur emissions and no incentive to hold allowance inventories”.

The EPA’s new, tighter rules in SO2 emissions won’t take full effect until 2012. In the meantime, “pollution is likely to spike in the short run”, said the July 12 NYT.

Many power plants have already installed “scrubbers” — an end-of-pipe technology that removes SO2 particles from the industrial exhaust.

But the NYT said “some plants might even find it more cost-effective to use [the remaining cheap permits] than to turn on scrubbers that have already been installed”.

Even before this fiasco, there was evidence the trading scheme had been far less successful at cutting S02 than other measures.

In their 2009 book Carbon Trading, researchers Tamra Gilbertson and Oscar Reyes found: “S02 emissions in the US had been reduced by 43.1% by the end of 2007, but over the same period 25 members of the European Union saw a decrease in emissions of 71%.”

Under the European scheme, a law was passed that said companies had to cut SO2 emissions. Firms that did not make the required cuts would be closed down.

No trading was involved and no permits were issued.

Emissions trading makes even less sense as a way to rapidly cut the six different kinds of greenhouse gases most responsible for climate change.

Gilbertson and Reyes said the biggest problem with emissions trading is it is aimed at the wrong target. “It is not directed at reorganising industrial societies’ energy, transport and housing systems — starting today — so they don’t need coal, oil and gas …

“Instead, it is organised around keeping the wheels on the fossil fuel industry for as long as possible.”