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The First, Tentative Steps

Cap-and-trade is by no means a new concept in American environmental efforts. What can other programs teach tomorrow's carbon traders?
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With carbon trading poised to become the next big U.S. business market and regional programs testing the waters for a comprehensive national cap-and-trade system, it's worth noting that carbon emission trading follows a well-worn path of making a market in pollution.

Within the last two decades, numerous cap-and-trade programs have emerged as nonprofits; local governments and businesses ranging from utilities to farms have collaborated to reduce pollutants discharged into water, air or natural environments while lowering the costs across-the-board for being cleaner.

Cap-and-trade programs have two parts, starting with a "cap" on the amount of a pollutant allowed in a given area or by a given polluter. Individual polluters (coal mines, power plants, etc.) receive credits allowing them to discharge a set amount of the pollutant, and those who can cut down their discharge are allowed to sell, or "trade," their unused credits to someone finding it harder to be green. In some plans, third parties can fire up their own mitigation measures and start minting their own credits, which grow in value as the cap gets lower.

In theory, the cap-and-trade system provides a functional and flexible framework where these market-based solutions (the buying and selling of allowance credits) can be used reduce overall pollution while giving companies (or land managers) financial incentives to develop environmentally sound practices.

While the majority of trading efforts focus on carbon and water-quality, other materials such as selenium, nitrogen, phosphorous and even temperature have been turned into credits that can be bought or sold by participants in state or local programs.

So, as the American Clean Energy and Security Act winds its way through Congress, here is a glimpse of a few smaller projects that highlight the versatility, and potential, of cap-and-trade.

Grassroots Efforts
Among the largest and oldest cap-and-trade systems implemented in the United States is the Environmental Protection Agency's acid rain program, begun after the Clean Air Act of 1990 to push utilities into sending less sulfur dioxide out of their smokestacks. By 2008, it was credited with lowering annual SO2 emissions by 56 percent compared to 1980 levels.

But cap and trade isn't only about smokestacks and tailpipes. One California economic incentive program arose after the buildup of a naturally occurring element in farm runoff water was linked to deformed waterfowl.

The project began in the San Joaquin Valley in 1996 after the Regional Water Quality Board imposed a limit on amounts of selenium — a necessary trace element in the body but dangerous in larger doses — in irrigation water drainage basins. It was helmed by the Grassland Area Farmers, a collection of local irrigation and drainage districts that collaborated to reduce the selenium discharges.

The project first imposed a cap on the total amount of selenium that could be discharged in the basin and then allocated the load among the patchwork of districts. Districts unable to meet the reduction requirement could choose to buy credits from other districts that could. After several years, according to Bureau of Reclamation statistics, selenium discharges in the Grassland Drainage Basin fell by 61 percent.

However, the credit exchange program was little used and has since been replaced by a plan that places a cap on selenium levels and manages the reduction of the discharge by region rather than district.

But expanding a project area doesn't mean a cap-and-trade program must go dark. A new program to swap nitrogen and phosphorus discharge rights was established to handle the basin of the Ohio River, which overlays Pennsylvania, West Virginia, Ohio and Indiana, and then feeds into the Mississippi River.

Three of the basin states — Pennsylvania, West Virginia and Ohio — have nitrogen/phosphorus trading programs, as does the Miami River watershed, but each ends at an arbitrary dotted line. The U.S. Environmental Protection Agency tasked the Electric Power Research Institute, in collaboration with power companies, regulators, farmers and others in the basin, to break ground on a "first-of-its-kind" interstate trading program that might serve as a model.

Excess nitrogen and phosphorus — commonly found in fertilizer, septic tank and wastewater discharges — can hurt land and river animals, and cause algal blooms that suck oxygen out of the water and can even change its taste and odor. Coal-fired power plants, in particular, discharge large amounts of these nutrients-turned-pollutants into the watershed.

Under the EPRI project, anyone in the region with a permit to discharge nutrients may buy or sell allowance credits. Farmers performing restoration acts — such as using less fertilizer, changing their till practices or installing a buffer strip between their farm and the point it reaches the water — will be able to parlay these actions into allowance credits that can be sold to utilities.

The project's backers believe that this system will reduce the amount of nitrogen and phosphorous discharges in the basin while lowering costs by using market-based trading between utilities. According to Jessica Fox, senior scientist for EPRI's Water and Ecosystems Program, credit trading is tentatively scheduled to begin within one to two years.

Temperature Credits on the Tualatin River
Cap-and-trade needn't be limited to tangible pollutants; nearly anything can be transformed into an allowance credit. Take, for instance, Oregon's "shade-a-lator", which calculates thermal load reductions and quantifies river water temperature into a tradable credit.

Rising water temperatures, due to industrial activity, were hindering the recovery of salmon in the state's rivers. So in 2004, the Oregon Department of Environmental Quality, together with the Clean Water Services organization, drafted new rules allowing municipalities or utilities to purchase temperature credits rather than buying barely adequate water-chillers to cool the water they discharge into the Tualatin River.

Now, industry can buy temperature credits from the farmers, ranchers and foresters who are actively cooling the riverbank area through projects like planting shade trees along the river.

The program has been a success for the Tualatin River, so much that The Willamette Partnership, a nonprofit organization, is drafting similar temperature credit protocols for the greater Oregon area.

"There are very few incentives [or requirements] for farmers, foresters and ranchers to restore streamside vegetation. And it's expensive to do so," explained David Primozich, executive director of the Willamette Partnership. The purchase of a temperature credit by a pollution-producing entity, Primovich explained, allows the riverside land managers to be both environmentally conscious and turn a profit.

While these highlighted programs showcase the versatility of the small-scale cap-and-trade systems, they are by no means the most exotic or comprehensive.

In the United Kingdom, credits can be traded to reduce the flow of biodegradable municipal waste in landfills. The Center for Conservation Solutions is working with partners to develop a habitat credit trading bank to protect the gopher tortoise.

Looking Forward
Cap-and-trade has clear benefits: It sets firm goals for pollution reduction (divided equally among participating entities). It provides these entities with the alternative of buying or swapping credits rather than simply requiring them to meet a certain pollutant reduction level — which is often cheaper than requiring immediate retrofits or closures.

Perhaps the most important benefit under many cap-and-trade programs is that the cash raised for the right to pollute (whether through buying a credit or paying a fine) often goes directly into solving the problem (creating incentives for land-use managers to practice restoration acts). While cap and trade doesn't guarantee transformative climate change regulations, it at least provides a rudimentary structure to begin to enact change.

But there are criticisms, often generated by looking at blemishes in Europe's existing carbon-trading program. Plus, cap-and-trade systems give pollutant-producing entities no real incentive to change their existing business plan — they only hassle them into spending money to pay for others to reduce pollution.

And while these smaller programs highlighted have displayed the potential benefits of cap-and-trade, taking these models and imposing them on a national or global scale is problematic. If the U.S. Congress does pass the first comprehensive cap-and-trade bill, hundreds of industries tied to the carbon market will be affected. Just quantifying the impact of every single carbon-producing entity (to generate credits) could provoke lawsuits, encourage fraud and even unintentionally spawn a black market for trading.

Despite these fears, the cap-and-trade seems to be the best stop-gap measure until future technology, or truly comprehensive regulation, can significantly reduce man's output of greenhouse gases. Reform has to begin somewhere, right?

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