(B.) Acid Rain Success Story: Wisconsin Electric Plays the Market
The on-the-ground experience of one large Midwestern utility provides an example of how the cap and trade mechanics of the U.S. Acid Rain Program work. Wisconsin Electric Power Company (WE), a subsidiary of Milwaukee-based Wisconsin Energy Corporation, has used the cap and trade program to reduce emissions of SO2 and still produce low-cost power, providing both economic and environmental benefits for its customers and the community.
"Under a cap and trade, a mid-sized company in Milwaukee, WI has reduced emissions by more than 160,000 tons over and above our requirements. I don't think that would have happened without cap and trade."
"With cap and trade, you can make a significant difference on the environment, and it won't cost your shareholders a significant amount of money, won't cost your employees jobs, won't impinge on unsustainable economic growth — but it will still provide benefit to the environment. This is a win-win situation."
Richard A. Abdoo, chairman and CEO of Wisconsin Electric
At the outset, WE devoted considerable resources to compliance planning. In the early 1990s, the company ran scores of scenarios looking at projected power sales and power plant usage well into the future. Computer programs estimated how much the utility would run each of its affected units and then calculated the resulting emissions of SO2 and NOx. These projections were then compared to their allocations under the U.S. Acid Rain Program.
After running the initial numbers in 1994, WE found themselves with 200,000 to 250,000 excess allowances for the five years of Phase I compliance. Excess allowances came largely from pollution control measures the company had previously implemented. However, the company found itself short 30,000 allowances per year for Phase II compliance, starting in 2000.
Excess allowances for Phase I could be banked or sold into the emissions trading market. In addition, the utility had several options relating to meeting Phase II requirements. These included: switching to low-sulfur coal; installing pollution control technology at the plant site; making modifications in the way they dispatched various electric generating units; and entering the market to purchase allowances. After comparing options, WE found fuel switching to be the most economic choice and one that would have the smallest impact upon its customers' power bills. It was estimated that fuel switching would reduce roughly 10,000 to 20,000 tons of SO2 emissions. Taking all this into account, WE determined that the most cost-effective strategy would be to sell the excess Phase I allowances and purchase additional Phase II allowances, as required.
WE testimony in July 1997 before the Joint Economic Committee of the U.S. Congress stated that making up the shortfall through alternative means, such as the installation of scrubbers on at least two units, would have been too expensive. By choosing a route combining fuel switching and strategic allowance sales and purchases, the company estimated that it saved $100 million.
With over 200,000 excess Phase I allowances for sale and the decision to enter the market to make up its shortfall for Phase II, WE put in place a trading strategy. The company would sell its excess allowances over time while simultaneously buying allowances for Phase II. This technique applied the principles of time weighting, in which the company engages in a steady flow of smaller trades over an extended period of time. This approach takes away the highest and lowest prices, but seeks the best price on average.
Overall, the program has been very successful, and WE met 100% of its compliance targets in a cost-effective and efficient manner.