Trading in Air Pollution?
By: Colin Isaacs, Member of the Clean Environment Scientific Advisory Council (as appeared in Semi-Annual Report, June 2000)
Within the next couple of years, a new kind of financial instrument called the Emissions Credit will be coming to Canadian markets. Emissions Credits, as measured in weight of a pollutant, are created by companies able to reduce their emissions beyond the level required by Provincial or Federal regulations. An Emissions Trading market in these "credits" will be formed in which cleaner companies are sellers and polluting companies are buyers.
United States ahead of Canada
Already well established in the U.S., Emissions Trading has been developed as a method to achieve improvements in environmental quality at lower cost and with less disruption to the economy than conventional regulation. For example, a government may decide that nitrogen oxide emissions (NOx) must be reduced by 20% over a given time period. NOx is a component of smog, an air pollution problem estimated to cause as many as 5,000 premature deaths in Canada each year. In the past, the government would have ordered all companies to reduce their emissions of NOx by 20% over current levels. For some companies the costs may be above their threshold for economic viability, resulting in a plant shutdown and loss of jobs. The plant may now remain open by buying credits to meet its targets. Emissions Trading is a way of minimizing the economic cost of the initiative while ensuring that the cleanest companies also have the opportunity to achieve real economic benefit.
Ontario Initiative
The Ontario government has announced that, as early as next year, it will address the need to reduce smog-causing emissions through a "cap-and-trade program". In simple terms, the government will establish a ceiling on total NOx emissions from large industrial sources, such as power plants and companies with large coal, oil, or natural gas fired manufacturing processes and steam boilers. Required reductions will be distributed among all companies in this category. In effect this creates a "cap" on NOx emissions for each company.
How Credits are Created
Once notified of its cap, a company will determine: 1) if it can achieve the cap through process change or technology improvement, 2) that it can in fact reduce emissions much more than its required cap at low cost, or 3) that it will be very expensive to meet the cap. Emissions Trading is a way to help companies in the last two categories. The company that can cheaply reduce emissions more than required by the cap will generate Emissions Credits representing the amount by which it has reduced emissions below what is required. The company that finds it uneconomic to reduce emissions will be able to buy credits to compensate for the amount by which its emissions exceed the amount of its cap.
A Market for Emissions Credits is Born
To ensure equitable treatment of both buyers and sellers, Emissions Credits trade on an open market with prices governed by the laws of supply and demand. Initially, prices will depend on the cost and availability of emissions control technologies including cleaner production technologies, degree of enforcement by government, ease of generating credits in the cleanest companies, and design of the program. Over time, the prices should rise as governments lower caps. Investment in Emissions Credit Futures is also possible. In the U.S. a small number of brokers have emerged as leaders in trading Environmental Credits. Most of these primarily serve the industrial market, but indications are that the number of transactions with investors who are not emitters is beginning to grow.
Clean Environment Companies
Several companies that have adopted "voluntary" Emissions Trading are well represented within the Clean Environment Mutual Fund holdings. For example, the KMS Peel Waste to Energy facility managed by KMS Energy Inc., was able to create Emissions Credits by reducing the amount of carbon dioxide (CO2) emitted from the plant during the period from 1992-1999. KMS Peel was later able to sell a portion of their Emissions Credits to Ontario Power Generator with proceeds amounting to just over $1.0 million, and have banked the remainder for future sales. Drayton Valley Power (DVP), another "Green Power" producer, has also taken advantage of the opportunities offered by Emissions Credits. As of December 1999, DVP was eligible for 150,000 tonnes of CO2 Emissions Credits every year and has banked approximately 500,000 tonnes for sale. As well, Northland Power continues to seek opportunities through the creation and sale of CO2 Emissions Credits.