How We Got Here (cont.)
The first steps to this increased flexibility came in the form of "bubbles" and
"offsets". Bubbles are a type of compliance mechanism, which allows a regulated facility
with multiple sources to combine their total emissions targets for the facility under a
"bubble". Facility operators could apply pollution control technologies to whichever source
under the bubble had the most cost-effective pollution control options, but the total amount
of emissions under the "bubble" would have to be less than what would have been allowed
if each source met the conventional requirement.
Bubbles allowed for the first form of emissions trading through intra-facility trading. Reductions and trades were negotiated with regulators on a case-by-case basis. While this cumbersome process was expensive, the system at least allowed for expansion at existing sources. New sources inside the bubble could be brought on line as long as the old sources reduced overall pollution amounts to compensate.
Offsets represent the next iteration of bubbles and have been used to account for new growth. Offsets are created when a source makes voluntary, permanent emissions reductions that are legally recognized by a regulator. Existing sources could trade offsets to new sources to cover growth or relocation as long as each trade was approved by regulators. These offsets were generally called emissions reduction credits or ERCs.
Although these early trading programs saved money and added flexibility, they were cumbersome to administer and had high transaction costs. The programs required the conversion of technology or emissions rate requirements into a tradable commodity, such as tons of a pollutant emitted. This required all parties (emissions credit generator, emissions credit receiver, and governmental authority) to negotiate and agree on a number of factors, including: baseline and future utilization rates for credit generating and receiving sources; the time over which the trade would be valid; and whether or not the reductions for credit would have happened but for the trade. Moreover, all parties had to agree on how emissions at both sources would be quantified. Finally, it was also often necessary to ascertain that the air quality would not be worsened by the transaction.
This process could be resource intensive and time consuming with changes to the agreement often requiring renegotiation. The process created significant transaction costs and limited the number of trades (and later the creation of ERCs) to those circumstances where there were clear and substantial economic benefits. Despite the considerable efforts to ensure that transactions would not worsen the environment, most air regulators and environmentalists remained suspicious of emissions trading.
The 1990 Clean Air Act Amendments included a section devoted to ozone control and further clarified the role and opportunity for offsets and potentially for other emissions trading. As a result, states and other policy advocates have worked with EPA to develop programs that enhanced flexibility while retaining the basic structure of a command and control program.