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4: The Government’s Role—Regulation and EPA Activity 57

The overall goal of an emissions-trading plan is to reduce pollutants
worldwide. The cap is usually lowered over time—aiming toward a national
emissions reduction target. In some systems, a portion of all traded credits
must be retired, causing a net reduction in emissions each time a trade
occurs. In many cap-and-trade systems, organizations that do not pollute
might also participate; thus, environmental groups can purchase and retire
allowances or credits and, hence, drive up the price of the remainder accord-
ing to the law of demand. Corporations can also prematurely retire
allowances by donating them to a nonprofit entity, thus becoming eligible
for a tax deduction.
Because emissions trading uses markets to determine how to deal with the
problem of pollution, it is often touted as an example of effective free-market
environmentalism. Although the cap is usually set by a political process,
individual companies are free to choose how or if they will reduce their emis-
sions. In theory, firms will choose the least-costly way to comply with the
pollution regulation, creating incentives that reduce the cost of achieving a
pollution reduction goal.
China, currently the world’s largest source of carbon emissions, issued its
ptg
own 63-page climate change policy in 2007. However, China also asserted
that countries that have been heavy polluters since the industrial revolution
began should do the most to tackle climate change. China’s emissions are still
low on a per-person basis, and its leaders, while mindful of the costs of envi-
ronmental damage, are focused on further development of their still-poor
nation.
In the United States, political momentum behind domestic measures to
counter climate change is building. But reducing greenhouse gases will
impose significant costs on energy-intensive industries such as steel, cement,
and chemicals. Many of the foreign rivals of U.S. industries are based in
developing countries, such as China or India, that have no current carbon
limits. And further international measures to address climate change aren’t
due until a planned Copenhagen summit in December 2009.
To prevent foreign makers from enjoying an advantage in the U.S.
market—and to keep U.S. companies from moving abroad in search of looser
regulations—the U.S. Senate bill would require importers to purchase emis-
sions allowances at the border. Supporters say the requirement also would
encourage developing countries to enact their own greenhouse gas limits.
However, opinions are split on whether the so-called border adjustment is
the most-effective way to cushion the competitive blow from new greenhouse
gas limits. American Electric Power, one of the nation’s largest utilities, is in