Air Pollution

Overview and Issues on Emissions Allowance Trading Programs Gao ID: T-RCED-97-183 July 9, 1997

Under emissions trading programs, pollution sources that reduce their emissions below the required levels can sell their extra allowances to other sources of pollution to help them meet their requirements. Trading of emissions allowances can be a less costly means to achieve pollution reductions than traditional regulatory approaches. This testimony focuses on (1) cost savings and pollution reductions from the Environmental Protection Agency's acid rain allowance trading program, presenting data based largely on GAO's December 1994 report (GAO/RCED-95-30) as updated to reflect current program data; (2) experiences with trading programs designed to control other air pollutants; and (3) issues that need to be considered in expanding trading programs.

GAO noted that: (1) in 1994, GAO reported that trading and increased flexibility provided under the Clean Air Act could reduce compliance costs by $3.1 billion per year as compared to conventional regulatory approaches; (2) GAO also estimated that SO2 emissions could be reduced by approximately 2 million tons below the level specified in the act; (3) currently, there is more trading of allowances between utilities than GAO reported in 1994 and prices being paid for allowances have fallen through 1996, suggesting large cost savings; (4) in addition, EPA's 1996 compliance report indicates that emissions of SO2 were 2.9 million tons, or 35 percent, below the emissions cap; (5) to date, there has been limited experience in applying trading programs to other types of air pollutants; (6) in one example of a trading program, the South Coast Air Quality Management District has implemented a trading program in the Los Angeles area to reduce air pollutants that contribute to the area not meeting national air quality standards; (7) district officials believe the program will be more cost-effective than traditional regulatory approaches; (8) EPA plans to issue additional guidance for states to follow in establishing various types of trading programs that the agency believes will provide states with more flexibility to decide the most cost-effective way to reduce emissions; (9) several key issues need to be considered in expanding emissions trading programs to other pollutants; and (10) these issues include the need for reliable emissions data, penalties to discourage noncompliance, the allocation of emissions allowances, and the development of trading boundaries, to ensure that actual emissions reductions are achieved.

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