Pollution-Credit Trading May Mushroom : * Environment: If buying and selling of allotments proves to be successful, markets may spring up for Southland companies.
The Chicago Board of Trade’s proposal to open the first national markets in air-pollution credits meets a central goal of many environmentalists and regulators: getting the muscle of economic incentives behind the campaign to clean up the air.
These first markets hold little initial interest for California’s big polluters--they will be trading in one of the few emissions that don’t figure much in the state’s environmental problems. But the exchanges are likely to be a proving ground for similar markets in Southern California and across the country.
“Making a market work--buying and selling and determining what the prices ought to be--we think this can best be done in the private sector,” said Brian McLean, acting director of the acid rain division of the U.S. Environmental Protection Agency.
The markets will play a fundamental role in the new pollution control mechanisms created by last year’s amendments to the federal Clean Air Act.
Under the law, polluters will be issued allotments based on their current needs and the EPA’s goal of greatly reducing air pollution in two steps, with rules that tighten in 1995 and again in 2000.
Utilities will learn from the EPA by 1993 how many one-ton-a-year allotments they will receive. Polluters will then be free to meet the lower emissions standards either by investing in cleaner technologies or by buying allotments from other companies whose emissions are so far below the standards that they have credits to sell.
The first markets are only for sulfur dioxide, the prime component of acid rain. The utilities that will get the first round of allotments will be able to trade credits directly on a cash market and also trade on a futures market, in which contracts are bought and sold for later delivery of pollution allotments.
Mark Prout, spokesman for the Chicago Board of Trade, said 1993 would be a “ballpark estimate” of when cash and futures markets in acid rain emissions could begin operating.
Acid rain is largely a problem for East Coast coal-burning power plants. If anything, Western utilities--which generally use newer technology and cleaner-burning fuels--are more likely to find themselves with extra emissions credits to sell.
“We are interested,” said Ed Freudenburg, spokesman for the Los Angeles Department of Water and Power. “There may be opportunities to be allowance sellers when a market is established.”
The DWP owns about 22% of both the Navajo Generating Station in Arizona and the Mohave Generating Station in Nevada. It is also the biggest customer of the Intermountain Power Project in Utah. All three plants operate well under the EPA’s tightening emissions standards and expect to receive unneeded allotments.
Other utilities might trade allotments outside the CBOT but look to it to set benchmark prices.
“It’s an interesting concept,” said Michael M. Hertel, manager of environmental affairs for Southern California Edison Co. “But we most likely would deal with other large utilities, direct.”
If successful, the acid rain markets are likely to be only a start.
The CBOT, for instance, wants to open markets on any air pollutants authorized for trade by the EPA, including greenhouse gases. And the Southern California Air Quality Management District may establish a regional exchange in credits for nitrogen oxides and hydrocarbon emissions--two of the major components of the Southland’s smog.
That market, expected to be formally proposed by the end of 1991, would allow trades only within the four-county basin regulated by the AQMD.
Private trade in some air-emissions rights has gone on for years in Southern California, on a company-to-company basis. Regulators say a broader market would present a number of challenges:
* Emission levels for each polluter could be difficult to assess, since each would meet the standards with its own combination of lower emissions and allotments. * State public utilities commissions could stop a utility from selling part of its allotments if it believed that such deals could jeopardize future power-generating capacity.
* There could be conflict over the income from allotment sales.
“If they did sell, who would profit?” asked Jack Brunton, environmental services supervisor for San Diego Gas & Electric Co. “Ratepayers or the shareholders?”
How It Would Work
The Chicago Board of Trade announced plans this week to launch markets in federal acid rain emission credits. While there will be direct trading between industries in pollution credits, the CBOT also wants to establish a futures market in the credits. Following are questions and answers about the proposed exchange:
How do futures markets work?
Such markets trade in contracts to deliver a certain commodity at a specific price months or even years later, with the difference in current and futures prices helping to control fluctuations in cost to the buyer. They can be used by investors wanting to hedge risks or by speculators looking for profit.
How would the pollution-credits futures market operate to hedge risk?
A utility might sell on the cash market its unneeded pollution allotments but offset its risk of being caught short of credits by contracting to buy allotments on the futures market. If a heat wave or other seasonal fluctuation in power demand created a need for extra allotments, the utility could take delivery on the futures contract--at the lower pre-heat wave price locked in earlier. If the allotments aren’t needed, the utility could resell the futures contract.
How would the market work for speculators?
Speculators would simply bet that they could anticipate fluctuations in the futures market, buying low and selling high.
What will an allotment cost?
Board spokesmen expect futures trading to begin at about $400 a ton.
What if no allotments are offered on the market?
The EPA has authorized as a last resort direct sale of allotments at $1,500 a ton, as well as an annual auction of allotments, to the highest bidders.
