Smog over Los AngelesPresident Obama is betting that a cap-and-trade program can help solve the climate crisis. Southern California leaders hoped the same thing when they set up a cap-and-trade program to clean up the region’s air. The results? See above. Photo: jordansmall via Flickr

Nearly 20 years ago, a novel program called “cap and trade” was rolled out by Congress and the U.S. Environmental Protection Agency. The aim was to keep rural Northeastern lakes from being tainted by corrosive “acid rain” created by power plant emissions hundreds of miles to the west.

Under the cap and trade, everybody would win. A whopping half of all the sulfur dioxide-the key ingredient in acid rain-would be cut more quickly and cheaply than if the companies were forced to do it under straight regulation. Lakes, forests and streams, and the fish and people living in and around them, would be spared further ravages.

The program succeeded spectacularly, with emissions targets reached three years ahead of schedule, at an estimated 75 percent in industry savings.

But did it halt acid rain?

Not exactly. In fact, researchers say many lake and stream beds are still highly acidic, and the problem is now spreading to the Southeast. They estimate another 50 percent to 70 percent cut in the remaining sulfur emitted by power plants is needed to really lick the problem.

If the House American Clean Energy and Security Act survives the Senate, what exactly has Congress bought into on behalf of the American public? There is a long, little discussed track record for other cap-and-trade programs. Leaving aside the money, the results are sobering. Not one has definitively cleaned up a major environmental problem. Adding insult to injury, environmental justice advocates say the market programs have allowed power plants and other industry routinely sited in poor, minority neighborhoods to keep spewing out toxic pollution by buying credits from elsewhere.

It’s true that some cap-and-trade programs are still new and others have demonstrably helped reduce pollution. But there is simply no precedent showing that a cap-and-trade system would deliver in time the significant cuts in greenhouse-gas emissions that scientists say are critical to prevent catastrophic climate change. To the contrary, past programs have been dogged by start-up challenges and, even more disquieting, surprises from Mother Nature.

It helps to think of existing programs as a family while delving through the acronyms and mind-twisting verbiage of cap-and-trade policy. There’s the founding father patriarch in D.C., the “out there” California uncle people tend to forget about, the globe-trotting European cousin, and Reggi, the new kid on the block in the Northeast, jumping up and down yelling “look at me, Ma!”

Below is an overview of the cap-and-trade family tree based on interviews with staff and online documents. We’ll leave the shouting to others for now.

What is cap and trade?

The “cap” is a legal limit set on one type of air pollution. A coal fired power plant is told it cannot emit more than a certain number of tons of carbon dioxide per year, and is allocated one credit for each ton it is allowed to emit. Each year the cap is lowered, until the pollution is reduced to a level that scientists and regulators deem safe.

The “trade” refers to the market trading of those pollution credits. Polluters who clean up their act so much that they are well below their yearly cap can sell the leftovers for a tidy profit to others that cannot or will not meet their own cap. In some cases the government auctions the allowances instead of allocating them.

Meet the Family

“ACID RAIN” … grandfather of them all: Whenever critics savage the merits of selling the right to pollute, supporters invoke EPA’s sulfur dioxide (SO2) Acid Rain Program as a shining success story. After rural areas in the Northeast complained in the 1980s about dangerously high PH (acid) levels in their pristine lakes and streams, scientists concluded the contamination was due primarily to sulfur dioxide drifting hundreds of miles from belching power plant smokestacks in the Midwest.

Acid rain was linked to a host of problems, from killing fish to pitting car paint and destroying views in national parks. For humans, walking or swimming in water contaminated by sulfur dioxide it is not particularly dangerous, researchers said. But the pollutants that cause it form fine particles that can be inhaled deep into people’s lungs and have been linked to heart and lung disease, asthma, bronchitis, and premature death. But despite the scientific evidence of ill effects, industry balked at costly regulation, saying it wasn’t clear their emissions were the source.

To placate all sides, Congress amended the Clean Air Act in 1990 to create the nation’s first cap-and-trade program. Dangerous sulfur emissions from large power plants would be halved by 2010, while saving utilities a projected 20 percent in costs over traditional regulation. The program appeared to work perfectly. By 2007, three years ahead of schedule, sulfur dioxide emissions had been cut by 50 percent, at a savings of $2 billion annually to companies in today’s dollars.

Some of the reasons why it worked may sound familiar: the program created incentives for industry to invest in new technology and alternative fuel sources, with a level playing field ensured by continuous, verifiable emissions monitoring. Sulfur scrubbing equipment was about to come on the market anyway, automatic emission monitoring was available at the plants, and utilities were able to switch to burning either less polluting natural gas, or “low sulfur” coal being opened up in vast, new deposits across the country.

But have regulators halted acid rain? “No, we have not,” said Brian McLean, director of EPA’s office of atmospheric programs, and an architect of the cap-and-trade program. “We have made significant reductions, based on what was our best judgment at the time that was necessary. The PH [acidity] levels of lakes and steams improved, but they did not improve as much as we thought they would.”

In fact, while acid rain deposits have been reduced by about a third in some cases, there’s a long way to go.

“We haven’t finished the job, I guess is the best way to put it,” McLean said. “It just did not go as far as the science had indicated it would back in the 1990’s.”

The reasons are complex, he said, mostly tied to new findings about how sulfur is deposited and flushed out of soil and waterbeds. In response, EPA proposed an even steeper cap on SO2 a few years ago, as much as 70 percent. While there was some grumbling, most companies and every state but North Carolina agreed.

But three major utilities, including Duke Energy, better known for touting its desire to participate in a greenhouse gas cap-and-trade program, sued to stop the new sulfur cap. The EPA is now working on revisions.

Earlier this month, McLean politely sidestepped answering whether he thought cap and trade was the best approach to achieve the huge cuts in greenhouse gas emissions scientists say are needed to fight climate change.

“The important thing to remember is there are a lot of tools with environmental problems,” he said. “Cap and trade is one of those tools, and it can work very successfully in certain situations. I think it worked very well for acid rain. It works very well for large industrial facilities, and it works very well when the goals are clear, and the rules are clear.”

“RECLAIM” … the wacky uncle: While D.C. regulators were setting up the acid rain program, southern California regulators were busy forming the REgional CLean Air Incentives Market to reduce the main ingredients in the Los Angeles basin’s soupy smog. There are lessons to be learned from the program’s successes and failures, regulators admit. In fact they compiled a long report on the subject.

Set up by the South Coast Air Quality Management District in the early 1990s, the aims were sweeping: slash emissions of nitrogen oxide (NOx) by 70 percent and sulfur oxide (Sox) by 60 percent from refineries, power plants, chemical plants and other major polluters, as part of the push by the region to meet tough federal limits on deadly air pollution by 2010.

Again, the language sounds familiar: “RECLAIM is a revolutionary new approach to air quality regulation. This program has the potential to clean up our air more effectively than traditional regulations by harnessing the power of the marketplace,” reads an agency fact sheet.

In reality, the program suffered major problems early on, including a bad case of fraud by a rogue emissions trader, recession pressures, and worst of all, the state’s electricity deregulation crisis in 2000 and 2001. Eventually it stabilized, and the targets were met and extended.

But William J. Kelly, co-author of “Smogtown: The Lung Burning of Pollution in Los Angeles,” who worked at the agency when RECLAIM was being set up, said if AQMD had stuck with existing regulations that required Southern California Edison, Los Angeles Dept. of Water and Power and others to install state-of-the-art pollution controls by the mid-1990s, the region’s air would have been cleaned up far faster. Instead, with the region in a deep recession and companies lobbying for less costly regulations, pollution credits were over-allocated. With plenty of credits to meet the cap, the major utilities and everyone else stalled on making costly improvements.

“We did give more generous allocations than we should have,” said Jill Whynot, director of strategic initiatives for AQMD. Still, emissions levels dropped slightly each year, thanks to the cap. But when the electricity crisis and the threat of blackouts hit, power plants cranked up their dirty, old equipment to maximum levels. Prices for credits shot skyward, and the cap was eventually ignored, with levels of nitrogen oxide skyrocketing above legal limits in 2000. After a few years, the program began achieving steadier reductions.

But Southern California today is still the nation’s most polluted air basin, with as many as 16,000 premature deaths a year due to air pollution. Environmental justice advocates in particular despise RECLAIM and a second “priority reserve” credit program, saying they allow big polluters like power plants and refineries to continue belching out deadly air pollution by buying credits from facilities elsewhere.

Local regulators say that is not the whole story. They say that apart from a few crisis years, the program has worked. They point out that the lion’s share of the remaining pollution in greater Los Angeles today comes from diesel trucks, trains, ships and planes, which they are not allowed to regulate under state and federal law. Whynot said there are other regulations in place to rein in localized pollution, said Whynot, and there is simply no way to satisfy the concerns of environmental justice critics who will never embrace emission trading. There are proposals in the works to try to shave another 20 percent off SOx still emitted by major polluters, using cap and trade.

“I think, personally, RECLAIM takes a lot more heat than it deserves. Even during the early years, when allocations were high, emissions were lower,” said Barbara Baird, district counsel for AQMD. “But if there was anything at fault, it was the early allocations. People didn’t think ahead that there was going to be a point where there would no longer be enough credits. And that’s why we have in our lessons learned (report) that people don’t necessarily behave the way you think they will.”

“EU ETS” … The continental cousin: After George W. Bush bailed on the Kyoto Protocol in early 2001), the European Union member nations moved forward without the United States, piecing together the Emissions Trading Scheme, or System, that eventually will require them to reduce the six worst greenhouse gases by an average 8 percent from 1990 levels. The program has been dogged by problems and controversy, but regulators insist it is beginning to pay off in actual reductions. But evidence of those reductions is hard to come by.

The Emissions Trading System is split into phases. From 2005 to 2007, just as AQMD had done in California, ETS staff say nations were way too generous in handing out emissions allowances. That meant there was no need for the polluters to buy credits or make actual reductions. That in turn led to windfall profits of $1.7 billion for utilities in Britain, according to one report, along with steep increases in customers’ electric bills. There were even increases rather than reductions in emissions in some places.

For the second phase, running from 2008 to 2012, Environment Commissioner Stavros Dimas cracked down on member nations, forcing them to sharply reduce pollution allowances handed out to polluters. In May, he announced that the tough new rules were paying off, with a 3.06 percent reduction in emissions of six greenhouse gases in 2008, by more than 11,000 businesses in 27 nations participating in the Emission Trading System

“It confirms that the EU has a well functioning trading system, with a robust cap, a clear price signal and a liquid market, which is helping us to cut emissions cost-effectively,” said Stavros in a rosy press release on May 15.

But there is little to no concrete evidence that the Emissions Trading System is what achieved those greenhouse gas reductions. While emissions did fall in 2008, Environment Commission staff concede that is at least partly due to other factors. Unseasonably warm weather reduced demand for heat from polluting utilities, and the global recession, which slowed production of many polluting industries.

“We had reductions, but is not clear whether the reductions were clearly due to trading,” said Barbara Helfferich, spokeswoman for the ETS office, based in Brussels, who stressed that it was important not to confuse greenhouse gas emissions reporting with the cap-and-trade system. Helfferich added, “We are sure that a good part of the reduction is from the ETS.”

But when she was asked in a follow-up interview if there was any verified data showing greenhouse gases dropping as a result of emissions trading, she said “no.”

Data released at the end of May by a second agency, the European Environmental Agency in Copenhagen, showed an encouraging 9.3 percent drop from 1990 levels in greenhouse gas emissions by 27 countries in 2007. But there was no direct link in the inventory between the overall drop and the Emissions Trading System.

To the contrary, the main reasons cited were unseasonable weather and higher prices for fuel outside the trading cap. Most nations did for the first time report how much of their greenhouse gas emissions were covered under the trading system, showing increasing participation at widely differing levels. For instance, in Finland, two thirds of all CO2 emissions were covered under the cap and trade system in 2007, while in France, one third were covered.

The ETS program is the first multinational attempt to drastically reduce greenhouse gases. Emissions from a wide range of sources, including everything from power plants to mules and asses, are now covered and measured annually. European polluters are now also allowed to buy a small part of their credits from “clean development mechanism” projects in developing countries, which has produced a small amount of verified emission reductions, but also sparked controversy. One 2007 review in Nature magazine found that 30 percent of all CDM offsets were coming from credits from China that could have been reduced far more cheaply or even voluntarily, freeing up money for other more costly greenhouse gas reductions, but were instead translated into hefty profits on the international carbon market. Other reports found irregularities in emissions reporting from international projects elsewhere.

The cap on greenhouse gases is scheduled to drop sharply in coming years, meaning large reductions from trading could be seen. But as nations prepare to gather in Copenhagen this fall to draft a new international climate accord, it’s still an open question whether the EU program, by far the world’s largest, is reducing greenhouse gases.

“REGGI” … the new kid on the block: Under the Regional Greenhouse Gas Initiative, ten Northeastern U.S. states agreed to slash carbon dioxide emissions from power plants by 10 percent from averaged 2002-04 levels by 2018.

“It’s modest,” said REGGI Corp. executive director Jonathan Schrag. The UN’s best estimates are that greenhouse gases need to be reduced by 80 percent by 2050 to stem climate change.

To meet the cap, all large power plants in the 10 states are assigned a credit for each ton of CO2 they are allowed to emit under the cap. The main difference between REGGI and other trading programs is that it relies on auctions of the type that President Obama originally wanted at the national level, requiring polluters to buy credits, with proceeds returned to public coffers.

“The auction component is a major innovation,” said Scrag. “I think it’s a significant advantage if you are able to return to the public the benefits, the value of capturing the price of CO2 emissions.”

Indeed, REGGI’s emission reductions may be modest, but the economic benefits have proved sizeable, with more than $260 million generated by June 1. Despite hard times, the states are sticking to their commitment so far to use auction proceeds for environmental programs.

But are greenhouse gas emissions being reduced to the set levels? In fact, the target is so modest that emissions were already below the cap in 2008, and are again so far in 2009, years ahead of schedule. As in Europe, that may be due to increased energy efficiency and warmer winter weather rather than carbon trading.

With fresh reports on the more rapid pace of melting glaciers and other ecological calamities, and the low price of carbon on the REGGI market, critics argue the cap should be tightened. But Schrag said while that was a valuable lesson learned for future stages, the 10 states had agreed up front not to change the rules mid-course, and they’re sticking to that.

“They have committed to review the program at the end of 2011,” said Schrag.

Environmental justice advocates have the same concerns in the Northeast as in the Southwest and Europe, noting the power plants are still sited in poor neighborhoods that can least afford the public health impacts.

Schrag said member states are taking steps to ensure such concerns are addressed, although not the way activists might advocate. Maryland is subsidizing electric bills for low income ratepayers, Massachusetts is creating so-called “green” jobs in poor neighborhoods, and nearly all the states are setting up energy efficiency and weatherization programs to help reduce costly heating bills and use of polluting fuels.

The REGGI member states have made it clear they want to be folded into a the national cap-and-trade program proposed by Waxman and Markey. In the meantime, Schrag said, it’s an important pilot program that builds on the shoulders of the acid rain and EU programs, and which can guide the federal government and western states such as California as they put programs in place.

“We are pioneering. We are the first mandatory, fully operating carbon trading system in the country,” he said. “But I think it’s important to appreciate the innovations that have gone forward from the very early cap-and-trade programs, building upon the experience in Europe and with acid rain, and to adapt those programs to the new challenges of greenhouse gas regulation.”