Energy 2.0

Is carbon trading an Easy Way out?

Posted on: May 5, 2008

In the era of sustainable operations and growth momentums, emission legislations play an important role by being checks and balances of the system. The United States being the largest producer and consumer of energy has an effective role in this. But, with President Bush do away of federal monitoring systems and the Kyoto protocol; it has become the prerogative of individual states/organizations and the preachers of sustainability, to show some action in regulation of Greenhouse gas (GHG) emission through self regulation and advocation of best practice methods. State Governments for a sustainable economic growth have started imbibing strict emission regulations but the effects of regulation has been interpreted by authors on one end as a driving force for innovation and efficacy in industries; but on the other as an instigating tool of increased cost.

Action in terms of state based federal self-regulation and emission control is presently through the Chicago Climate Exchange (CCE). The mission and vision of CEC is to provide members both from private and public sectors with cost-effective methods for reducing their GHG emissions through building and operating a market-based emission reduction and trading program. The member group operates on a cap-and-trade system at trading prices between $1.15 and $1.35 per Carbon Financial Instrument (CFI) with the base year as 2003. Compliance is through internal reductions, purchase of allowances by members facing emission limitations from others, or purchase of credits from Emission Reduction (ER) projects that meet specific criteria.

But, emission reduction programs / tradables are not “region specific”; by that we mean ER programs are not run at the point of pollution but at “convenient locations” and so are tradables. It can be better explained by the following example (Figure 1). Consider, a Thermal power plant A with X amount of excess over emission regulation; it has the option of,
a) Buying the emission tradable certificates for the excess X (or)
b) Investing in a ER project / renewable portfolio standard (RPS) to provide a sink for excess X
The problem with the scenarios depicted is, they are not region specific; that is, the tradeables or the ER program can be bought/done from any member with no criteria on region of actual pollution control, thus providing no benefits for the stakeholders in the pollution region. This is like “outsourcing” the Pollution Control instead of regulating it at point of pollution.


The future scenario should involve
a) Providing subsidiary and Tax incentives to innovative preventive pollution systems, rather then providing subsidiary across the board for RPS systems.
b) Broader system scope involving pollution abatement technologies executed at point of pollution with stakeholders involvement
c) Basic GHG policy agreeable to all regions at the national level to create universal standards of operation.

As Thomas. L. Friedman puts it as the movement of the herd in his book, “Lexus and the Olive Tree”; one section is looking in to how to abate pollution through innovative technologies and sustainable policies (the Lexus) while, others are involved in stagnant polices involved in subsidized RPS and outsourced carbon sequestering.

– Pramodh Panchanadam (2005)

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