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Understand the cost of reducing pollution using Marginal Abatement Cost (MCA) and Measuring Cost of Pollution to Society (MSC). Learn how Tradable Emissions Permits work, comparing strategies and costs. Explore successful emission trading cases and the impact on environmental and financial outcomes.
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MCA Measuring the Cost of Reducing Pollution (Marginal Abatement Cost) $/unit of Emissions 6 4 2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 Level of Emissions
MSC Measuring the Cost of Pollution to Society (Marginal Societal Cost) $/unit of Emissions 6 4 2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 Level of Emissions
MSC MCA The Efficient Level of Pollution $/unit of Emissions 6 4 MCA > MSC MCA < MSC 2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 Level of Emissions
MSC MCA Setting Pollution Standards $/unit of Emissions Standard 26 12 Level of Emissions
MSC Fee 3 Total Abatement Cost MCA Total Fee 12 Fees set to achieve the same optimal level of pollution as under standards $/unit of Emissions Standard 26 Level of Emissions MCA> Fee: pay fee MCA< Fee: abate
EXPLANATION OF HOW TRADABLE EMISSIONS PERMITS WORK The government (or whatever public regulatory agency has the rights to regulate pollution emissions) decides on a certain level of emissions for a given pollutant in a given region or country. This overall level for the region must be translated into a specific standard that has to be met by each of the polluters in that region. Governments do that by assigning pollution permits (i.e. the right to emit a given amount of pollution) to individual companies or plants. Those pollution rights may be given away for free (as they are in the EU for CO2 emissions) or auctioned to the highest bidders (as they have been in the US for SO2 and NOX emissions). The holders of the rights can then decide to either use them all and emit the total level of pollution corresponding to the rights they hold or emit less than the rights they hold and trade the unused rights to another polluter who is interested in buying them. The trading usually takes place through a government or privately run exchange to which and from which holders of rights buy and sell (rather than having to identify and sell directly to each other). This exchange is similar to a commodities exchange. Governments who are seeking to reduce pollution emissions over time will set targets and allocate rights on an annual basis with a decreasing target over time, i.e. fewer rights are assigned in future years in accordance with pollution reduction emissions targets. A workable pollution trading business requires a clear commitment from the government as to the amount of permits issued in the present as well as plans for the future. Otherwise, the traders cannot adequately measure the value of the permits.
Savings in Achieving Pollution Reduction with Emissions Trading Cost of achieving an 85% reduction in hydrocarbon emissions for DuPont Three Options: 1. 85% reduction at each plant Total cost =$105.7 million 2. 85% reduction totalwith internal trading Total cost =$42.6 million 3. 85% reduction totalwith internal and external trading Total cost =$14.6 million
Success in Emissions Trading of SO2 and NO2 in the US • In the 1970s, the US had a serious problem with “acid rain” associated with emissions of sulfur dioxide (SO2) and nitrogen dioxide (NO2). • The US government placed a cap on emissions of each of the pollutants and assigned tradable emissions permits. The program was an enormous success: it permitted the industry to achieve the mandated level of reductions in the pollutants at 40% less than the estimated cost under a “command and control” standard.
Acid rain is no longer a problem in the US!
