In a move closely observed in Southern California, the Chicago Board of Trade was chosen by the government Friday to run the world's first exchange in pollution credits.
CBOT will deal in federal allowances for utilities to emit sulfur dioxide--which causes acid rain--in a plan to cut emissions in half by the year 2000.
These rights can be purchased by utilities that might find buying them more cost-effective than spending money directly to reduce their own emissions. A power company whose smokestacks emit too much sulfur dioxide could instead buy credits representing excess emissions reductions at another utility that has been able to surpass federal requirements in reducing emissions.
Economists have advocated such market-based pollution control systems for years as an efficient way to clean up the environment, and many environmentalists have come to agree.
"This is good news," said Joseph Goffman, a senior attorney with the Environmental Defense Fund. "Private institutions like the CBOT can help utilities find the lowest-cost way" to meet the required pollution cuts.
The U.S. Environmental Protection Agency chose CBOT to administer an annual auction of allowances, a central feature of the plan called for in the 1990 Clean Air Act.
CBOT will also set up cash and futures markets and make direct sales of credits--at the set fee of $1,500 for the right to emit one ton of sulfur dioxide per year--to utilities as well as to speculators. The auction price is expected to be lower.
Utilities including Southern California Edison Co., Pacific Gas & Electric Co. and San Diego Gas & Electric Co. will be players in the CBOT trading--most likely as sellers. Most West Coast utilities depend on cleaner natural gas, rather than the pollution-belching coal burned by many East Coast utilities, and will be able more easily to lower their emissions.
Having CBOT run the acid-rain market is "good for our ratepayers because it makes a market," said Michael M. Hertel, Edison manager of environmental affairs. "You don't have to deal with just one potential buyer--and have to guess at what the fair price would be."
The South Coast Air Quality Management District is planning a similar system for Southern California. The AQMD wants to use credit trading to spur reductions of a wider range of pollutants in the South Coast Air Basin. Whether the district will turn to an outside exchange like CBOT hasn't been decided.
Earlier this month, the AQMD hired the Pacific Stock Exchange and CalTech to study the potential market and suggest how trading could be managed. The AQMD is also consulting with pollution-market experts at EPA and CBOT.
The district expects to set pollution-reduction levels and list the Southern California companies to be included in its market in January. It hasn't yet set a deadline for deciding details of the market mechanism.