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BACKGROUND TO EMISSION TRADING
The issues that brought together the requirement for the control of Greenhouse Gas (GHG) emissions are well known and stem from a global concern for the environment that has its roots as far back as 1972. The causes are only now becoming of real concern as the effects of continued unmanaged imposts on the environment are more noticeable to the general public and public awareness

The following article outlines the basis for emissions trading as a response to the management of Greenhouse Gas emissions.

EMISSIONS TRADING

DEFINITION
What is Emissions Trading? - Emissions trading is a regulatory program that allows firms the flexibility to select cost-effective solutions to achieve established environmental goals. With emissions trading, firms can meet established emissions goals by: (a) reducing emissions from a discrete emissions unit; (b) reducing emissions from another place within the facility; or (c) securing emission reductions from another facility. Emissions trading encourages compliance and financial managers to pursue cost-effective emission reduction strategies and incentivizes emitting entrepreneurs to develop the means by which emissions can inexpensively be reduced.
Cost Savings - Over the last 20 years there have been thousands of emissions trades. Some individual firms have made or saved tens of millions of dollars through the use of emissions trading. Economists estimate that, when compared to traditional command and control, aggregate compliance costs have been reduced by up to $13 billion. These cost savings continue to grow as governments integrate emissions trading into strategies that achieve local, regional, national, and global emission reductions.
Current Regulations and Practice - Though an international greenhouse gas trading program has captured worldwide headlines, most emissions trading programs are found in the United States. Most trading in the United States springs from the Clean Air Act (CAA) and falls into two categories: (1) programs designed to accommodate new growth; and (2) those whose purpose is to improve air quality. Critical to both is the common currency, the air credit or allocation.

Creating Air Credits - Depending upon the trading program, air credits are created when a firm voluntarily reduces emissions below that level required by law or emits less than allowed by its allocation or permit. The credit can be achieved by putting on new controls devices, modifying the process, curtailing, or shutting down emission sources. Credits can be denominated in discreet pounds or tons, pounds per day, or pounds per season (eg., ozone and non-ozone season).

Using Air Credits - Once created, an air credit can be used, banked (stored) for later use or sale, or sold or leased immediately to another entity. Depending upon the trading program, the credit can be used to mitigate a single pound of emissions or emissions that occur over a day, a season, a year, a number of years, or into perpetuity.

Using Emissions Trading to Maintain the Air Quality - In areas that do not attain air quality standards (dirty air areas), new and modifying sources with major increases of non-attainment emissions (pollutants that contribute to the air quality problem) and their precursors (eg., NOx, VOC, SOx, CO, and particulate matter) must install expensive controls and mitigate the residual impact by securing air credits. Air credits secured internally allow a facility to avoid or "net-out" of control-related requirements. Air credits secured from other firms are often called "offsets". To date there have been 5,000 to perhaps more than 12,000 netting transactions and several hundred offset transactions. Resulting savings have been estimated to be $25 million to perhaps more than $300 million in permitting costs and $12 billion in control costs.

Using Emissions Trading to Clean-up the Air - In recent years, emissions trading has replaced command and control as the method of choice to reduce emissions from existing sources. Under such programs an "emissions budget" is developed for all sources in a defined area. The area could be an airshed, a state, a group of states, an entire country, or, the entire world. The emissions budget is then divided among emitting companies. Depending upon the program, each company's share of the budget can be based on historical emissions, capacity, or units produced. Political and legislative deliberations also influence the distribution of the allocations. Over time, the overall budget and each company's allocation declines. To operate within the declining budget, a firm can under-control and buy credits, emit less than allowed or over-control and sell credits, use a mixture of controls and credit acquisitions, or curtail operations on a schedule that is parallel with the declining budget. New entrants (companies not granted an initial allocation of emissions) generally must "buy-in" by securing an allocation of air credits from companies with allocations.

Greenhouse gas air credit trading has emerged as a mechanism to reduce greenhouse gas (GHG) emissions such as carbon dioxide and methane. While the global mandate for reducing GHG emissions is not yet in place, it may yet emerge out of the December 1997 Kyoto Conference. Participating countries agreed to specified GHG emissions budgets that are tied to 1990 emission levels. Participating sources within each country may then be allocated a proportional share of the budget and/or allowed to participate in an auction to acquire such GHG allocations. GHG allocations can be used to mitigate the impact of defined GHG producing activities, sold to GHG emitting sources without a sufficient supply to meet anticipated needs, or stored for later use or sale.

The Outlook for Emissions Trading - The outlook for emissions trading suggests that its use will continue to expand. The regulated community favours a well designed trading program because it provides the flexibility to pursue least cost solutions. Regulators favour trading because it allows them to avoid prescribing how and what sources should do, while instead of focusing their resources on what they do best - monitoring and enforcement. Environmentalists and the public like trading because it provides a greater degree of assurance that air quality will be improved by the required increment and on schedule. Technology vendors are using trading to bring to market new technologies that aid in both achieving compliance and generating revenues through the sale of surplus emission reductions.
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