Capping carbon.

• Author: Driesen, David M.

1. INTRODUCTION II. EMISSIONS TRADING AND CLIMATE DISRUPTION A. Emissions Trading as an Antidote to BAT 1. BAT 2. Intellectual History of Trading as a BAT 3. Emissions Trading in US. Law: Aggregate and Individual Caps B. Emissions Trading to Address Climate Disruption III. SETTING CAPS A. Possible Ways of Setting Caps B. Cap Setting in Practice 1. BAT Caps 2. Effects-Based Caps 3. CBA and Cap Setting 4. Caps on Greenhouse Gas Emissions IV. TOWARD BETTER CAP SETTING A. Aggregate Caps B. Individual Caps 1. Market-Based Cap Setting 2. Administrative Cap Setting V. CONCLUSION I. INTRODUCTION

   This Article addresses the problem of how to set caps--limits on the pollution from identified facilities--for cap-and-trade programs, a key problem in pending legislation addressing global climate disruption. (1) Cap-and-trade programs establish caps on regulated polluters' emissions, but allow these polluters to forego meeting their caps if they pay other regulated polluters to go below their assigned cap. (2) This Article describes how we have set caps for trading programs in the past and explains how we can do better in setting caps for the cap-and-trade programs addressing global climate disruption. (3)

   This topic has enormous importance. (4) The election of President Obama and a sympathetic Congress makes a national cap-and-trade program meaningfully addressing climate disruption very likely. (5) The federal government is not alone in embracing this form of emissions trading. The European Union (EU), (6) other developed countries, several U.S. states, (7) and the Kyoto Protocol to the Framework Convention on Climate Change (Kyoto Protocol) (8) have placed variants upon a cap-and-trade program at the heart of international, national, and regional efforts to address climate disruption. (9) This development comports with a vast "instrument choice" literature affirming cap-and-trade's value. (10)

   This literature, however, has paid much more attention to the advantages of trading emission reduction obligations than it has to the problem of establishing a cap. (11) Indeed, several commentators have obscured the problem by suggesting, wrongly, that cap-and-trade programs "automatically" reduce emissions. (12) Setting the cap properly matters more to environmental protection than the decision to allow, or not allow, trades. (13) In the climate disruption context an insufficiently stringent cap, or one set too late, can have disastrous consequences because every ton of carbon emitted while governments struggle to establish strict caps remains in the atmosphere for an extremely long time, contributing to future warming. (14) We already live in a much warmer world that has significantly impacted our environment because we have waited so long to set caps. (15) If the world becomes much warmer still while governments struggle to establish meaningful caps, serious irreversible consequences may well occur. (16)

   Descriptively, this Article shows that a best available technology (BAT) approach has dominated many efforts to set caps for emissions trading programs. Under this approach, governments establish mass-based caps or rate-based emission limits for a trading program grounded in an evaluation of what the regulated industry can achieve at its own facilities with available government-identified technology. This claim that BAT often controls cap setting for trading raises profound questions about environmental legal theory, for scholars usually describe trading as an antidote to the delay and complexity associated with BAT regulation. (17) My description suggests that emissions trading often becomes a form of BAT regulation, rather than an alternative to it. This suggestion implies that cap-and-trade programs do not necessarily deliver better environmental performance than the BAT regulations they aim to replace--a troublesome conclusion given the seriousness of the climate disruption problem. (18) The rest of the Article explores this insight's implications.

   Analytically, this Article compares BAT caps to the main alternatives: effects-based caps set to avoid unacceptable environmental consequences and caps set using cost-benefit analysis (CBA) to establish an "efficient" level of reduction. This analysis shows that all of three of these approaches have significant practical and normative advantages and disadvantages. Only an effects-based approach, however, avoids the technology evaluation problems associated with BAT.

   Normatively, this Article shows that a legislative effects-based approach offers the potential to vastly improve our effort to avoid dangerous climate disruption. Realizing the potential benefits of effects-based cap setting requires a change in our thinking about how to set environmental goals. Setting caps without consideration of particular technologies will require that we deemphasize cost considerations in setting caps. This suggestion runs against recent trends in environmental law, but this Article defends this step in the climate disruption context.

   Trading's susceptibility to BAT-like problems means that legislatures should seek to avoid litigation and delay in establishing caps. (19) Auctioning permits, rather than allocating them through administrative decision making, provides a means of avoiding BAT-like delays in establishing meaningful caps. Many regulators and scholars recognize that auctioning enhances efficiency, avoids windfall profits, and generates revenues that government can spend to further advance environmental or other societal goals, but they have not fully appreciated its importance in avoiding serious administrative difficulties. (20) This insight should lead Congress to view complete early auctioning as vitally important to the success of the trading program, not just as an optional improvement to be phased in over time. To the extent that Congress allows administrative cap setting, it should take pains to minimize the potential for those processes to get bogged down in administrative controversies and litigation.

   In order to focus on caps, this Article will not address questions about how to design trading properly to realize the goals embodied in caps. (21) While the existence of this enforcement issue shows that the notion that trading automatically generates reductions is wrong, resolution of the question of how to ensure compliance with a cap lies beyond this Article's scope. (22)

   This Article begins with background on emissions trading and its role in addressing climate disruption, which establishes some relevant concepts and history. This background information shows that the environmental case for emissions trading relies heavily on viewing it as an antidote to the complexities limiting the efficacy of the BAT approach. Part III lays the analytical groundwork for the normative claims to follow by discussing the possible ways to set caps, and by contrasting BAT, effects-based, and cost-benefit approaches to this task. This Part also contains the meat of the descriptive claim, as it examines the BAT approach's role in establishing caps in enacted emissions trading programs. Part IV explains the analysis's implications for trading design, changing our thinking about environmental law, and climate change bills pending in Congress.

2. EMISSIONS TRADING AND CLIMATE DISRUPTION

   This Part first discusses how scholars have traditionally viewed trading as an antidote to various problems with BAT. It then discusses trading's applicability to the climate disruption problem. This treatment of trading's intellectual and practical history focuses heavily on the cap's role in trading programs, and introduces some critical distinctions between different types of caps.

   1. Emissions Trading as an Antidote to BAT

      1. BAT

         Regulators have traditionally regulated pollution predominantly by establishing uniform performance standards, i.e., standards that apply the same quantitative pollution reduction requirement to each facility within an industry. (23) These performance standards often take the form of a rate-based emission limit, such as a limit on the amount of pollution per unit of output. (24) While commentators often use the word "cap" to refer to a mass-based limit only, (25) this Article will use the term to refer to both mass-based and rate-based limits, (26) as both types of standards arise in trading programs and pose almost identical issues for regulators setting the limits. (27)

         Economists have long complained that uniform performance standards use private capital paying for pollution control inefficiently. (28) Facilities within an industry often have widely varying marginal control costs. (29) When marginal control costs vary, regulators can, in theory at least, achieve the same aggregate pollution reduction goal for an industry that a uniform standard realizes far more cheaply through nonuniform standards tailored to each facility's marginal control cost. (30) Facilities confronting relatively high pollution control costs could make fewer reductions than a uniform standard requires and facilities blessed with relatively low costs could make more reductions than a uniform standard requires, while the regulated industry as a whole still achieves the same aggregate reduction level that a uniform standard demands. (31) This sort of fine-tuning would lower the overall cost of achieving an aggregate pollution reduction goal. (32)

         Yet, regulators use uniform standards precisely in order to avoid the massive administrative costs involved in tailoring caps to match each facility's individual characteristics. (33) When establishing uniform standards using a BAT approach, regulators begin by identifying technologies capable of reducing targeted pollution. While critics decry regulators' tendency to rely on end-of-the-pipe technologies in establishing BAT standards, (34) regulators may take fuel switching and other kinds of measures into account in setting BAT standards. (35) To establish...