Emissions Trading 101 Corky Martinkovic Arizona Dept. of Environmental Quality Air Quality Division ~ Planning Section WESTAR BART Technical Conference August 31 – September 1, 2005 ~ Portland, Oregon

World Before Trading  Stationary sources would obtain permit  Emissions would be monitored and reported  Compliance with permit conditions tracked  Go on like this for next 5 years or until a modification tripped a permit revision

In a constant universe…  There would be no changes to regulations or air quality  There would be no need for source to change its production capacity  There would be no fluctuation in the market for the source’s materials  There would be no demographic shifts

However…  Faced with change – sources could: …apply controls …find a way out of applying controls …shutdown …Or, they could trade

How emissions trading was born  Some sources could afford to apply controls and wanted to reap the benefits, and offset the cost of controls  Some sources could not afford to apply controls and wanted to reap the benefits of increased capacity, and offset the cost of controls  But how to find each other…

The World of Trading  The concept of trading is as old as dirt  Emissions trading began in 1970’s  EPA’s 1990 Acid Rain Program capped sulfur dioxide emissions in the east  Trading became “institutionalized”  But, with or without a trading program, sources can trade emissions

Flexibility requires structure  Before trading was given a structure sources needed to discover on own:  Where can I find available emissions?  How do I know these emissions are any good?  Is the cost of the trade realistic, fair?  How do I account for these emissions?  Can I keep these emissions for a rainy day?  I’m new – how can I get some emissions?

Essential Elements Because trading must be: EfficientTransparentReliable Emissions reductions must be: QuantifiablePermanentEnforceable

How is that done?  You build a trading parlor  Foundation and walls = permits  Décor = monitoring and reporting  Nails and wiring = compliance  Tables with place cards = registry  Servers = brokers or agents  Cashier = administrator  No uninvited guests, no back room tables, no flies in the soup, and no watered-down drinks

Will they come to my trading parlor?  Emission caps - sorry, we have a drink limit  Law of supply and demand – sorry, we’re all out of lobster  Backstop milestones – sorry, we can’t seat you until 2018  Compliance – sorry, we don’t serve your kind here

Optimizing  Trading programs need a “critical mass” of traders – buyers and sellers  Programs that capture more traders increase critical mass  Trading must be cost-effective  Trading allows for flexibility in a changing market, making reductions more likely  It’s bad business to poison the customer