shortcomings
of the traditional
regulatory approach to
emission
reduction programs
1)
Failure to recognize that
emission allowances can be used to create incentives for environmental improvement
The traditional distribution of allowances
amounts to giving money away and getting nothing in return. It is no accident that
economists call the distribution of emission allowances a wealth transfer. Emission
allowances are valuable because the supply is limited by the emission cap, and demand for
allowances is created by the requirement that polluters (high-emitting fossil
fuel-fired power plants) acquire enough allowances to cover their emissions each year.
The emissions cap will be achieved regardless of how the allowances are initially
distributed. The distribution of allowances is therefore a separate issue from setting the
emissions cap and requiring polluters to acquire enough allowances to cover their
emissions.
2)
Polluters
do not recognize their ongoing emissions as a cost
Polluters must acquire enough allowances to
cover their ongoing emissions. The traditional approach of giving allowances to polluters
fails to make allowance acquisition costs an unmitigated expense item that would help
focus business managers on the clear economic choice of buying allowances or taking action
to reduce pollution.
3)
Failure to reward and create
incentives for emission reductions delivered by energy efficiency and renewable energy
projects implemented by non-emitters (sources that are not
high-emitting fossil fuel-fired power plants)
Traditional allowance distribution fails to reward
businesses, organizations, or individuals that cause reductions in emissions by increasing
their energy efficiency or use of renewable energy. The owners and implementers of these
projects should be rewarded for their positive emission reduction actions.
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