`Retiring' pollution credits helps both business and environment
Dean S. Sommer, ContributorA promising connection between business and environmental groups is emerging from the trading and "retirement" of pollution allowances under the Clean Air Act. Voluntary corporate retirement of allowances keeps tons of pollution out of the environment, helps companies create an environmental image, and even can provide sizable tax benefits.
Under the Clean Air Act, utilities and manufacturers with large boilers are governed by a "cap and trade" system in which "affected sources" are allocated "allowances" to emit certain amounts of specified air pollutants. The purpose of the cap and trade system is to lower emissions while providing sources with flexibility in complying with the law.
The "cap" portion of the system refers to the specific amount of emissions that may be discharged within a state, region or the nation as set forth by the Environmental Protection Agency and the Clean Air Act. The "trade" portion refers to a participant's ability to buy or sell the allowances. States, or the EPA, allocate emission allowances to affected sources in specified amounts to ensure that the cap is not exceeded by emissions from all participants.
The EPA and the states have established separate cap-and-trade allowance systems for the most common pollutants, sulfur dioxide and nitrogen oxides. These elements combine with water in the atmosphere and create acid rain and other forms of fine particulate matter that can endanger human health. Nitrogen oxides also contribute to ozone, causing smog.
The cap-and-trade system has been in place for electric utility sulfur dioxide emissions since 1995. A nitrogen oxide cap-and-trade system currently is being implemented by the states in a 22-state region of the eastern United States, including New York. An "allowance" under the allowance system is equal to the emission of one ton of sulfur dioxide or nitrogen oxides.
Generally, public utilities are the only entities that utilize the sulfur dioxide allowance system, while the nitrogen oxide allowance system will affect all industries that utilize large boilers. Under the Clean Air Act Amendments of 1990, the overall statutory cap for sulfur dioxide is 8.9 million tons for the entire nation.
Under the cap-and-trade allowance systems, the EPA or the states allocate emission allowances to affected sources, using a complex set of formulas and policies. The source operator's obligation is to hold allowances equal to the annual emissions at the plant.
When a company has a deficit, it can come into compliance by purchasing additional allowances from entities that have a surplus. If a company has a surplus, it can sell the extra allowances directly to another affected source. Under the sulfur dioxide allowance system, participants also have the option of selling extra allowances through a yearly auction overseen by the EPA, which is held at the Chicago Board of Trade.
The sulfur dioxide allowance system does not limit participants by geographic region in their quest to find surplus sulfur dioxide allowances; however, nitrogen oxide allowance trading may be limited to certain regions or states.
Rather than selling extra pollution allowances, a company can choose to "retire" allowances by donating them to groups concerned about the environment, permanently removing the allowances from the marketplace. The ultimate result is that for each allowance that is retired, one ton of sulfur dioxide or nitrogen oxide that could have entered the atmosphere never will be released.
In 1997, the Adirondack Council, a group dedicated to protecting the Adirondack Park, received a donation of 5,000 sulfur dioxide allowances from Niagara Mohawk Power Corp. Through a program set up by the Adirondack Council, these allowances were retired. In 1998, Niagara Mohawk made a second 5,000 allowance donation to the Adirondack Council as part of its "Power Choice" electric industry restructuring agreement approved by the state Public Service Commission.
Allowances can be purchased directly from the emitting industry or utility or from an "emissions broker" (the Emissions Marketing Association is a trade organization of such brokers). The Chicago Board of Trade also markets the allowances.
Relationships between industry and the environmental community often are complex. A bit of good will at the right moment, by the retirement of an allowance, can create a positive working relationship and may be more beneficial than the actual commercial value of the allowance itself.