Carbon Permits

Carbon dioxide (CO2) is a naturally gaseous compound, exhaled by humans and animals; conversely, it is used by plants during their photosynthesis process to make sugars and other organic compounds. Oxygen and water vapor are byproducts. Carbon dioxide is also a greenhouse gas (GHG) that helps regulate the temperature of the Earth. However, the volume of CO2 since the beginning of the Industrial Revolution has continually increased because of the burning of fossil fuels—coal, petroleum, and natural gas—as well as the burning of biomass such as wood, including large forested areas. The increase in the amount of CO2 (and other GHGs, mainly methane, nitrous oxide, and water vapor) in the Earth’s atmosphere has alarmed many scientists and environmentalists because it is believed to cause global climate changes. In response to numerous proposals for reducing the volume of CO2 generated by modern industry, there have been technological advances in transportation and other sources of CO2.

It would be a very unpopular approach to simply use legal actions or draconian force to immediately reduce CO2 emissions from automobiles, power plants, and other sources. Such a command-and-control program would very likely meet with civil protests and could cause immediate and serious harm to economic activity and masses of people. Instead, a system of incentives such as carbon permits is one mechanism for reducing the rate and total volume of CO2 emissions.

Carbon Permit Mechanisms

In 1990, Title IV of the Clean Air Act Amendments instituted a system of tradable pollution emissions permits in order to cut sulfur dioxide (SO2) emissions in power plants. The act provided for the creation of the U.S. Acid Rain Program, which cut emissions by 40 percent. The success of the program inspired the creation of a trading system for nitrous oxide (NO2) emissions. The system then encouraged the European community to develop a system for carbon emissions.

Carbon permits (also called emissions allowances) are licenses, used as part of a scheme of carbon trading, that allow companies (such as coalor methane-fired power plants) to pollute. There are two main forms of carbon trading: (1) cap and trade and (2) offsetting.

Carbon permits and emissions permits, which allow for other GHGs besides CO2, are issued under a cap-and-trade scheme by governments or intergovernmental bodies. The government caps the emissions allowed by a plant or industry for a certain time period. The cap sets an overall legal limit on CO2 emissions for a time period, such as a year. The government then issues carbon permits or emissions licenses to different industries for that period. In effect, the industries are allowed to pollute some, but not over the cap amount. The goal is to encourage the development of efficiencies in industrial processes that reduce the amount of CO2 emissions. If a company is successful in reducing its emissions, then it can trade the balance in the form of credits to other companies.

The market in carbon-emissions permits allows companies that may have older and more polluting plants to buy the carbon permits. This allows them to stay in business, but it reduces their profits and theoretically provides incentives for developing less polluting processes in future plant designs. If many companies continue to pollute, then the scarcity of carbon permits will increase the price and, theoretically, provide incentives for developing lower polluting processes.

The European Union’s Emissions Trading Scheme (EU ETS) is the world’s largest cap-andtrade marketing mechanism, launched in 2005 through a scheme of European Union Allowances (EUSs) and allocated through the National Allocation Plans. It is subject to European Commission approval. The plan covers about 11,000 power plants, factories, refineries, and other facilities across 30 European countries. Norway, Iceland, and Lichtenstein also participate.

The EU ETS system started with the goal of reducing emissions, but experienced a dramatic drop in permit prices in 2006 when it became apparent that allocations for polluting were overly generous. Targets in the EU ETS were readjusted when it entered its second phase (2008–12). Carbon-offset systems are based on trading emissions between industrialized countries and poorer, less-developed countries, allowing emission-saving projects to pollute in industrialized countries and then compensate the developing world with carbon credits. This type of system can run parallel with a cap-and-trade scheme. In a carbon-offset system, earned credits allow the industrial polluter to pollute above set limits. The world’s largest offset projects have developed under the United Nations Clean Development Mechanism (CDM).

Critics of the CDM system and carbon offsets have pointed to the fact that CDMs have generated projects that negatively impact climate because they are based on an additionality. This concept sets a baseline for the future and then assumes that the future is altered for the good of the climate. Credits are awarded on this presumed future, which cannot be predicted with certainty. Other critics have urged the abandonment of both carbon permits and carbon offsets in favor of a straight carbon tax, without any exemptions. The U.S. Congress has yet to institute a carbonemissions trading system. The American Clean Energy and Security Act of 2009 (ACES) failed to pass. As of 2011, Congress is working at creating a better system of carbon permits.