January 10th, 2018
Effectiveness of Emissions Trading in Reducing Global Warming (part 2)
A second way through which emissions trading is carried out is via a baseline credit. Through this method a participant is allocated a level of emissions scheduled over time (baseline) that is inclusive of expected change in technology and other aspects that would result into emissions growth (Jaffe & Stavins 2007; Wang, et al. 2009). When firms undershoot their emissions baseline, they earn credits that can be sold to firms that need to increase their baseline (Jaffe & Stavins 2007; Wang, et al. 2009). An example of an emissions credit trading program is the offset policy developed by the U.S Environmental protection Agency (US EPA) in the 1970s aimed at decreasing the environmental degradation from new emissions’ sources (US EPA 2006). Following such a policy other offset policy systems that aim at ensuring unavoidable negative environmental impacts are counterbalanced by a positive environmental benefit aimed at an overall net environmental gain have been enforced in different sectors (US EPA 2006).
The differences between the two Emissions trading systems arise with respect to a number of features. In the implementation timeline for instance the cap and trade system is more time consuming due to the large number of design elements required for its implementation (Sandbag n.d; Jaffe & Stavins 2007). Similarly the role of the regulator differs in the two systems. In the trade permits system the regulator is responsible for such aspects as apportioning permits, tracking trades and assuring compliance but not reviewing each transaction (Sandbag n.d; Jaffe & Stavins 2007). In the credit system on the other hand the regulator does not only apportion baseline credits, track trades and ensure compliance, but also must reviews and approves each trade (Sandbag n.d; Jaffe & Stavins 2007). Due to these differences the expenditures for permit system are high upfront but low when the system is in place whereas the running costs for a credit system due to the review that must be carried per trade (Jaffe & Stavins 2007). Further differences exist with reliability of the systems and their market size (Garner 2006). Despite these differences both forms of emissions trading provide firms with opportunities to manage their operations to a desired level that does not greatly impact on their costs of doing business.
Emissions trading is associated with providing a better incentive to firms than the conventional emissions standards in leading to pollution reduction behavior (Stavins 2001; Montero 2005; Ellerman & Joskow 2008). This first results from its establishment of a price on pollution with firms that emit higher quantities of pollutants assuming a higher cost than those emitting smaller quantities (Montero 2005; Ellerman & Joskow 2008; Yeoh 2008). Through a process where firms are financially disciplined for their emissions above their apportioned share while being rewarded for emissions less than the share, emissions trading provides firms with an incentive to evaluate pollution reduction technologies more intensively (Yeoh 2008). As an aspect to which a price has been pegged, emissions costs become internal costs of doing business their effect being visible on the balance sheet hence affecting the financial position of the company (Yeoh 2008; Stavins 2001). Such an effect provides a more intense incentive to pursue emissions reduction strategies rather than universal standards that do not take into consideration a firm’s contribution to overall pollution (Stavins 2001).
A second advantage of emissions trading is flexibility. Market-based instruments avert the bureaucratic environmental control associated with command and control systems thus giving participants the flexibility to institute cost-effective ways of doing business (Stavins 2001; Montero 2005). Emissions trading allows various compliance alternatives thus increasing the level of flexibility. Firms that for instance predict their future emissions levels to exceed their current levels can bank surpluses for future use providing compliance flexibility in terms of time (Stavins 2001). In such a way firms are provided with a way of avoiding uniform technological standards of the command and control systems that could dissuade efforts towards emissions reduction where shift to such standards are cost intensive (Stavins 2001; Montero 2005).
With proper regulation, emissions trading also bears another advantage of being an environmentally sound proposal. Since the overall emissions level is under the control of a regulatory agency, emissions is restricted within a desirable range thus limiting the environmental degradation in line with predetermined goals (Ellerman & Joskow 2008). Through a well structured emissions trading system, firms could thus be encouraged to pursue emissions reduction strategies that do not only allow them to earn additional profit by selling surplus permits but also achieve the common goal of reducing the overall GHG emissions within the country.