Chapter I. Introduction
At the heart of the cap and trade approach to emissions trading is a focus on environmental performance rather than on technological compliance. This shift in focus protects the environment while allowing regulated sources to determine the best means of compliance in the context of other decisions facing each source. This flexibility enables regulated sources to minimize the cost of pollution control and also provides incentives to develop innovative and cost effective substitutes and pollution control strategies. Although cap and trade is not appropriate in all settings, it has been used successfully in past programs and may be applicable to address future pollution problems.
How We Got Here
In the nearly 30 years since EPA has been regulating air pollution, ground level
ozone (smog) and its precursor nitrogen oxides have proven to be some of the most
difficult control challenges. Regulation of these two pollutants in the U.S. has evolved over
time with changes in the economy, our scientific understanding, and technology.
Early pollution control programs often required sources to install a specific technology or to achieve specific emission rates, concentrations or percent reductions at all facilities. The overall goal of the Clean Air Act was to protect public health. And, the regulatory approach was to pick levels of control that were fair _ both in term of the amount of pollution they would remove and the individual cost that would be born by sources. That said, regulations typically contained provisions to exempt specific sources if it was found that compliance would be too costly or physically impossible.
The problem with this approach was that as the economy grew, the total number of sources and the total number of hours of operation increased. As a result, regulations could not keep up with increasing levels of pollution, and air quality deteriorated.
Regulations continued to limit the flexibility of sources to emit. Rules required that sources install certain technologies or meet even lower emission rates. In certain cases, the regulations required that no additional sources be placed in areas where air quality had become unhealthful. But even this was not enough to control pollution.
One problem with the approach was that it implicitly allocated a scarce resource _ the ability to emit pollutants _ to the first taker rather than according to a strategy which accounted for the value of that resource. As cities and towns grew they began to find that they could not afford, from an air quality perspective, to allow new sources to locate within their borders, nor could they allow existing sources to expand. It was determined that this situation was untenable and regulations needed to change to increase flexibility.