Emissions Trading

by Kalpana Palkhiwala, Deputy Director, Press Information Bureau, New Delhi

Emission trading that is, Cap and Trade is a market-based approach to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. A central authority or a regulator sets a limit/cap on the amount of a pollutant that can be emitted but does not decide what any particular source will emit. This cap is sold to firms in the form of emission permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits or credits equivalents to their emissions. The total number of permits can not exceed the cap, limiting total emissions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits. The transfer of permits is referred to as a trade. This way, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions.

There are two main active trading programmes. For greenhouse gases the European Union Emission Trading Scheme is the largest programme and a National Market to reduce acid rain in United States.

Emissions trading schemes have great potential to lower pollution while minimizing costs for industries. The benefits of such schemes come from two sources. On the industry side, units are able to choose for themselves the cheapest way to reduce pollution. In comparison, traditional command- and-control regulations do not allow for differences across industries. Mandating the same standard everywhere will generally miss the best opportunities for abatement. On the regulatory side, an emissions trading scheme, once established, will provide a self- regulating system that makes pollution control more efficient. In the longer run, the reduced costs of compliance can also make it easier to introduce new regulations that increase environmental quality. Past experience with emissions trading, has shown that cap-and – trade is a robust way to achieve targeted reductions in emissions at a low cost.

Four areas are especially important for successful implementation of an emissions trading scheme.

Setting the Cap- The target for aggregate emissions from the sector where trading is introduced must be set to produce reasonable prices and emissions reductions.

Allocating Permits -The permits to emit must be distributed in an equitable way to build support for the scheme. In many successful cases this allocation has been made for free relative to baseline emissions, greatly reducing the cost of compliance for industries.

Monitoring - The quantity of emissions from each industrial plant must be reliably and continuously monitored with high integrity recognized by all sides.

Compliance - The regulatory framework must make industries confident that buying permits is the only reliable way to meet environmental obligations.

Greater Benefits from Emissions Trading

The introduction of emissions trading would position India as a clear leader in environmental regulation amongst emerging economies. The benefits of a trading scheme will extend beyond the immediate goal of achieving compliance at a lower cost to society. Having a trading scheme in place will make it easier to adjust regulation as environmental goals change. Tighter environmental standards can be achieved with a drop in the level of the cap, which would raise the price of emissions permits and give incentives to pollute less, rather than abruptly throwing certain areas or sources out of compliance.

India may also benefit by trying the system for local emissions trading to global emissions trading schemes for carbon dioxide. A successful cap-and-trade system will establish the infrastructure needed for putting a price on carbon dioxide as well as local pollutants, positioning the country to easily receive payments for the contribution of its innovative regulations to reducing greenhouse-gas emissions. The European Union Emissions Trading Scheme, Kyoto protocol and future carbon mitigation policies outlined under the Copenhagen Accord will generate demand for such reductions. An emissions trading system to meet this demand would generate a net flow of foreign investment and reward the Indian economy for growing along a green path.

Recent experience with market based regulatory instruments has been positive in India. A Perform, Achieve and Trade(PAT) Mechanism for energy efficiency, which will cover facilities that amount for more than 50% of the fossil fuel used in the country, and help reduce CO2 emissions by 25 million tonnes per year by 2014-15 , is being implemented. (PIB Features)

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