Emissions Trading - History

History

The efficiency of what later was to be called the "cap-and-trade" approach to air pollution abatement was first demonstrated in a series of micro-economic computer simulation studies between 1967 and 1970 for the National Air Pollution Control Administration (predecessor to the United States Environmental Protection Agency's Office of Air and Radiation) by Ellison Burton and William Sanjour. These studies used mathematical models of several cities and their emission sources in order to compare the cost and effectiveness of various control strategies. Each abatement strategy was compared with the "least cost solution" produced by a computer optimization program to identify the least costly combination of source reductions in order to achieve a given abatement goal. In each case it was found that the least cost solution was dramatically less costly than the same amount of pollution reduction produced by any conventional abatement strategy. Burton and later Sanjour along with Edward H. Pechan continued improving and advancing these computer models at the newly created U.S. Environmental Protection Agency. The agency introduced the concept of computer modeling with least cost abatement strategies (i.e. emissions trading) in its 1972 annual report to Congress on the cost of clean air. This led to the concept of "cap and trade" as a means of achieving the "least cost solution" for a given level of abatement.

The development of emissions trading over the course of its history can be divided into four phases:

  1. Gestation: Theoretical articulation of the instrument (by Coase, Crocker, Dales, Montgomery etc.) and, independent of the former, tinkering with "flexible regulation" at the US Environmental Protection Agency.
  2. Proof of Principle: First developments towards trading of emission certificates based on the "offset-mechanism" taken up in Clean Air Act in 1977.
  3. Prototype: Launching of a first "cap-and-trade" system as part of the US Acid Rain Program in Title IV of the 1990 Clean Air Act, officially announced as a paradigm shift in environmental policy, as prepared by "Project 88", a network-building effort to bring together environmental and industrial interests in the US.
  4. Regime formation: branching out from the US clean air policy to global climate policy, and from there to the European Union, along with the expectation of an emerging global carbon market and the formation of the "carbon industry".

In the United States, the "acid rain"-related emission trading system was principally conceived by C. Boyden Gray, a G.H.W. Bush administration attorney. Gray worked with the Environmental Defense Fund (EDF), who worked with the EPA to write the bill that became law as part of the Clean Air Act of 1990. The new emissions cap on NOx and SO2 gases took effect in 1995, and according to Smithsonian magazine, those acid rain emissions dropped 3 million tons that year.

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