1. Professor Bruce W. McClain, JD, LLM, CPA Cleveland State University, USA Professor Heidi Hylton Meier, DBA, CPA Cleveland State University, USA

2. Description and Goals of Cap and Trade U.S. Clean Air Act of 1990 U.S. Congressional Proposals Global Activities The Future of Cap and Trade

3. Cap and Trade Goals: To “steadily reduce carbon dioxide and other greenhouse emissions economy-wide in a cost- effective manner.” The ‘cap’ – is the limit, or the amount of greenhouse gas that a company can emit The ‘trade’ – comes into play when a company has not emitted all of the gasses that they are permitted to emit and have an excess allowance available on their permit which they can sell to another company

4. Cap and Trade The Federal Government  Can create a large and dependable revenue stream through the auction of emission permits which can be very profitable  Can achieve public policy objectives related to climate control and other economic development through this program

5. Cap and Trade Original Goals for the U.S. Program  To limit the rise in global temperature to approximately 2.0 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels by 2050 by reducing carbon dioxide and other emissions  This was to be accomplished by setting a cap (representing the original ‘cap’ in the component phrase) in the U.S. that would be steadily tightened until emissions would be 80 percent below 1990 levels of carbon dioxide gasses by the 2050 deadline

6. Cap and Trade Original Estimates of Profits for the U.S. Program  Some estimates from the Congressional Budget Office were from $50 billion to as high as $300 billion per year to accrue as follows:  10% to affected industries and their shareholders  half of the remaining revenue to assist low-income families shift to more efficient energy sources  the other half of the revenue for the development of renewable energy sources, green-collar jobs, and the transition to a low-carbon economy

7. Clean Air Act of 1990 Similar Program in U.S. Utilizing Cap and Trade Enacted during the presidency of George H.W. Bush as a response to the outcry from environmentalists and the damage that was being done by acid rain. Bush, campaigning to be the “environmental president” created the idea of emissions or allowance trading which has become the foundation for cap and trade The Acid Rain Program is viewed around the world as a prototype for tracking emerging environmental issues

8. Clean Air Act of 1990 Similar Program in U.S. Utilizing Cap and Trade Goal was to reduce annual sulfur dioxide emissions by 10 million tons below 1980 levels Law required a two-phase tightening of the restrictions placed on fossil fuel-fired power plants First phase began in 1995 and was directed mostly at coal-burning electric utility plants located in 21 eastern and midwestern states (40% reduction in first year) Second phase began in 2000 at which time the annual emissions limits were tightened on large, higher emitting plants and on nitrogen oxides

9. Clean Air Act of 1990 Similar Program in U.S. Utilizing Cap and Trade Key to this program is the allowance trading system Allowances may be bought, sold or banked Anyone may acquire these allowances and participate in the market, but no one may emit at levels that would violate federal or state levels EPA has an electronic recordkeeping system to track allowances and holds an annual allowance auction integrated program that lets market incentives do the work to achieve cost-effective emissions reductions All these contribute to an integrated program that lets market incentives do the work to achieve cost-effective emissions reductions

10. U.S. Congressional Proposals Congressional Proposals Approximate Costs if Implemented as a Pure Cap-and-Trade or Price Policy Allowance PathPolicy ObjectiveCO 2 -e Price, $/ton Welfare Cost % Comments 2015205020202050 Bingaman-Specter Draft 2007 Limit cost using a Safety Valve with cap-and-trade 739-0.06 -0.07 -0.46 +0.45 Gains in U.S. +ROW stem from terms-of-trade effects Udall-Petri 2006 Similar to Bingaman-Specter Lieberman-McCain 2007 Achieve emissions levels 60% below 1990 by 2050 for covered sector using cap- and-trade 31121-0.23-1.11National emissions allowed estimated at 216 bmt. Costs would thus be slightly lower. Feinstein August 2006 Achieve emissions levels 70% below 1990 by 2050 through sector-based policies 41161-0.32-1.45National emissions allowed is 195 bmt, costs would be slightly higher. Policies and measures rather than pure cap-and-trade. Kerry-Snowe 2007 Achieve emissions levels 65% below 2000 levels by 2050 for covered emitters using cap-and-trade ~47~141~-0.28~-1.62 Calculated as halfway between these two cases. Includes additional efficiency standards and other features. Sanders-Boxer 2007 Achieve emissions 80% below 1990 by 2050 using market-based and other measures. 53210-0.55-1.79 Waxman 2007 Similar to Sanders-Boxer with somewhat faster rate of decline to 2050 goal, leading to somewhat higher costs

11. The Current U.S. Proposal The Waxman -Markey Climate Bill In June 2009, the U.S. House of Representatives passed this bill by a vote of 219 to 212 It was a historical move as it was the first time the U.S. Congress had taken a legislative step to address global warming and try to change the way the U.S. would produce and use energy The mechanism, the cap-and-trade system, would limit emissions of heat-trapping gasses while allowing utilities, manufacturers and other emitters to trade pollution permits, or allowances, among themselves

12. The Current U.S. Proposal The Lieberman-Graham-Kerry Bill A much less ambitious bill proposed in the U.S. Senate was a much narrower version of cap-and-trade Graham pulled his sponsorship of the bill, and other important issues faced the Congress, it soon appeared that climate change legislation has been temporarily tabled.

13. Global Activities Phase I of implementing the Kyoto Protocol in Europe began in 2005 Virtually all EU states continue to participate Primarily limits carbon dioxide emissions from large users, including utilities and large factories However, it was found that early caps were not considered to be tight enough, and it was functioning almost as a voluntary control

14. Global Activities Phase II of the Kyoto Protocol will result in emissions reductions in 2010 of 2.4% as compared to what they would have been without the cap This is expected to be the first real meaningful, legally mandated reduction and it is expected to create a worldwide market for carbon credits Phase III is to be implemented between 2013 and 2020 with even tighter limits, will move from sales of allowances to an auction of allowances, and will achieve a reduction of 30% below 1990 levels by 2020

15. The Future of Cap and Trade Currently the world is divided into three camps: 1. The underdeveloped world 1. The underdeveloped world—with newly emerging manufacturing economies in South and East Asia—is currently exempted from the Kyoto Protocol requirements (ironically, includes India and China) 2. European Union countries 2. European Union countries—strongly committed to the Kyoto Protocol requirements 3. United States 3. United States—the only advanced industrialized country not pursuing emissions trading at the present time

16. The Future of Cap and Trade However, while the U.S. continues to delay in pursuing cap and trade legislation, some criticize that current proposals do not go far enough, but there are other debates as well-- Some suggestions are for renewable energy Other critics say that it is wrong to choose between global warming policies and renewable energy funding While others are pushing for more nuclear power

17. The Future of Cap and Trade It does appear that the future will most likely be a combination of all of of these strategies and policies— including cap and trade, renewable energy, and nuclear power. In addition, in order to achieve reasonable international goals, cap and trade will have to be expanded to include India, China and other emerging manufacturing economies.

18. References Broder, John M. “House Passes Bill to Address Threat to Climate Change,” The New York Times, June 27, 2009, pp. 1-3. “Cap and Trade.” The New York Times, March 26, 2010, pp. 1-5. Center for American Progress. “Cap and Trade 101.” www.americanprogress.org, January, 2008.www.americanprogress.org Environmental Protection Agency. “Acid Rain Program.” www.epa.govwww.epa.gov Greenblatt, Alan. “How Cap and Trade Was ‘Trashed.’” NPR (National Public Radio), April 26, 2010 Kanter, James. “Europe Considers New Taxes to Promote ‘Clean’ Energy,” The New York Times, June 22, 2010, pp. 1-3. Leonhardt, David. “Overcome by Heat and Inertia,” The New York Times, July 20, 2010, pp. 1-4.