&EPA
United States
Environmental Protection
Agency
Office of
Public Awareness (A-107)
Washington DC 20460
March 1980
OPA58/0
Environmental
Information
Controlled
Trading
What it is-
why we need it
air
and adnlstrtive hassle. Since 1970 EPA
within a re9u.l'**L'7tCfe*u i?th loCrces that were easy targets,
TaL'iMtfa? costs If control were relatively low. But for many
Mania's ft'. 3' ore intra e?b,, ^Juunt, ^J.^ '^dlSl
Su ipS!S"~0I-rS?%!ilM»^ that past 9a1ns My slow or
be reversed.
There
plant managers little room
by resistance or delay.
, have shown its industry can do more. For most firms, it
• ?Llv not "o?of i table" to invest in innovative efforts to do
15 S £ n IhP Uw currently requires. This point is critical, for
1°nP?h X hruna:nlUy"nno^tioeS can produce improved air quality
at reduced -- rather than increasing - costs.
Present regulation can deal with these threats- to air quality
•n tJTwavs It can try to squeeze more emission reductions out
of reguUted s rce , imposing much heavier costs per pound than
fir iStlal reductions. Or it can reach out to regulate smaller
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sources. Both-tactics mean .more^government iYitrtrs-io-n- and: "
enforcement burdens,, as well (a,s-'£fflall-er? payoffs per-snegut-atory.
action. Both mean, more ijidus.-tryt.res.-isrtffnce and;;pal"i&tcia,l~
problems. Both< pos»e; direct conflicts .between growth a,rei—:,.
clean air. • - , ;-/, i. .-. ,.--"*$'-.., -? ••" ;:*•?'--: :
., Control led; trad-Ing- offers; a -way-out 0-f this rtratfciby i
putting*: the prof-it motive -to-twork .forriroll'Utl-oa •con-trfrl rxivtfrin
the present regulatb"ry ""system. Most generally, it would allow
any source-to meet* fas*emission epitfroJ^espOTs.itHflit'i'es $ty, -•-
securing required reductienssfromjany-jjo^'ntS; within-._ltS",;0wtv
or other facilities, so le^as air qu-afi^ty anduthe
ability of the resulting trade in levels of control
equivalent. If a source can find or finance ways to remove
twice the amount of a. releva^pp^utant at.45>per-H30v^d ,-,-r-. ^
either within itsrTnm~pj^t^.QfKfrom._fl^ -
it can halve the $10- pounds it-is'npW requfr'ed ,to rem^vev. ~l .-;,-••;
In short, it can" trade a"relaxation^^f controls•",where; control " c
costs are very high-,, for increased controls where cps.ts,^. r^f-;
either of internal reduction or,, external; pufc^ase:.«— are-'=,^r5 7fr
relatively low.. ' ,fJ- ."": tic<- -;;•• ••-••£• icr::-,
Thus controlled trading allows a source to get someone; 5;;
else — or some other process — to meet required emission
reductions. Agd,a market for those; rgduct4pns wi 11.^ et sourp«S2
anticipate tfteir availabil ityhar5d;CQSt ,«cre§tingr grea-te^v
certainty .and more-.peductipnse.-'... ».*•> ;,:.-. • '- ' * -*•=-,
r. -v j" • *v > - . " "*- «i V r*' " n 'r " £ '"^"* ^f^-^U ,l!" "^ ' v ', „
This simple .step^pan-cappy.iarge-benefits;..' Fjrst^. a
studies of existing souFcesAand^r^the^ubb^e. indicaie,?'i#
can yield savings of "mitlions-pf. do! JarSjiTwitliouts,
impacts on ,ambient air, qua! 2ty.ccPlant-man|ge»?S; w^
such savings i?y re|i,stri bating eontrols will-eontinueits 3.
search forwfupther jnexperisfve reductions -ri-an«(-;will ^ave
a personal sta.ke in thejnew-conffguration, instead, .of viewing
controls as,-an interference -imposed from outside. ;_r ,
„ .
-controlled tj?|d ing ^builds ,,on the.pl4ntrspecific'.&l:;.
expertise wfyich 90^0! ;.agencles -can never duplicate.. Instead-'
of stopping with enforcement of-a uniform rule, it. encourages -•
plant managers to tailor nationwide requirements by counter-
proposing^a different mix of controls that will produce the •:-,.,
same result,. Since no IntrasQurce trade wi/IT take place unless -
savings -are /realized, and nq 1-ntersoupcg trad-e wilTctake placet,
unless both parties benefits this leaves ;state agencies free-to '
focus on technic%l [air .quality, while.- reducing wrangles^ ever. :
industry costs* t-',, •- ?-•;••' • ,--•-• - ' ""»•.;•
•if
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-- Th-irdy-c&n^r&-14«d"tradTTrg makes "tt prof ttatsTe "— for
the first ttme -f-t tar firms- to fnridVste "by cdntroll4ng ' --
more than r.eqtrtrechfc Sources wtriofr< produce -such ex^r^a- " ^~-
emission retnem a't a profit-'-to new-plants -
in need of offsets. These benefits can be magnified
by banking, which creates a continuous incentive for firms
to control as tfaflr-" as possible when^replacing* current" cdhtrelsv by
allowing_:such fd'rtis' to store redactions for future use- or sale-;
Banktng aslsfc' provides "i'nnovatla'n insurance Tor %x~isting:~ ••
sources, wMchtccan* secure' Offsets' to'^make^p'^he^idifferencej if
a new mettotf of '-pollution 'control falU^sti&K ef applicable'
requirements." • •• -- '•:,•-,;•
Fourth", £on'-tro13€d tradi ng" encourages Voluntary extra -
reductions by regulated and unregulated*1 sources. "'The: / y V
prospect of substant-tar savings or' profits can induce many '"'
firms to' fftstall? controls tha:t would be difficultHo mandate
by direct rsgula^'on.' The prospect can also induce effective
but difficult te require process changes. And it can 'make further
reduction feasible for those low-control-cost but low-profit
sectors of the economy that have of ten. been treated lightly
under State p'lahs. "" " o . -.«' £
' "
controlled tradirig"' can-ease political a^d admini- •'
strative pressures on har^j?iressea:S^te air agencies.' : "H -
injects needed flexibility into the regulatory pr'bcfiss'i enlistfng
industry as an ally rather than an adversary. It can sharply „
reduce compel' a ncfilJSflsts ^withQut^ciRangin^ the way emission
obligations are s:et:and enfSrcedV" Itfoffe!*§:.a 'route to'r!t- ife •
attainment wtn'cn ^oes hot' involve additional direct regulation; s
With bankihg-,"4t can'" spread permit approvals -over time," "relieve- :
pressures to find -offsets' during poTitic1aT1y-charge"o'"new source -
reviews, and help communities plan* for growth based on Known •""
amounts of emission credits. It gives enforcement agertfiies "
something positive to- distribute, not-additional "obligations. ;
And it reverses present incentives for industry to delay rather
than speed neg£}tfat1'8n§.*''A soupce whicfi eafi' benefit^from^a.rj&'^de
is losing money ea£n"vday>'that trad^ is/deTa'yed, Ind rwiU dd *~i-:~
everything possible to ass'ure'a prompt^resol'tTtion; ' ' *"••'
"~ fc. " • ^ '" "'^ *"
Controlled '-trading curfefitly consists of the bubble; new
source'^ offsets, and banking'. EPA is.-exptoriag other steps
including marketabTe perrttits aJiSl-.nteth,pds of allocating the clean
air increment in so-called* PSD -areas"-'- that would Expand the :?
universe of-traders and trades i provided that air qua-T-fty ffnd "
enforceability are preserved. The important point is that v •
these steps, like the existing ones, will give sources a range
of ways to meet air pollution requirements as cheaply and
efficiently as possible, and that they must reinforce each other
— and environmental goals — alike.
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For further information on controlled trading, please
contact:
Michael Levin
Chief, Regulatory Reform Staff
Environmental Protection Agency
401 M Street, S.W. (PM-223)
Washington, D.C. 20460
(202) 755-2884
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