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Taking up the Slack: Lessons from a Cap-and-Trade Program in Chicago

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  • Evans, David A.

    () (Resources for the Future)

  • Kruger, Joseph A.

Abstract

The Emissions Reduction Market System (ERMS), an emissions-trading program for volatile organic materials (VOMs) in Chicago, Illinois, has been characterized by emissions significantly below the annual allocation of emission allowances, allowance prices much lower than predicted, limited trading, and emission allowances that expire unused. Essentially, it appears that a fundamental prerequisite for a tradable allowance program is missing—there is no scarcity of allowances. We evaluate a variety of hypotheses that may explain why the ERMS cap does not appear to be affecting abatement behavior and identify three that contributed to the lack of scarcity in the ERMS program: (1) a baseline process that inflated the cap; (2) hazardous air pollutant regulations that contributed to VOM reductions at some sources; and (3) numerous facility shutdowns. We conclude that the ERMS experience illustrates the inherent unpredictability of economic, regulatory, and other factors when setting an emissions target; a conclusion that resonates with the recent experience of the European Union Emissions Trading Scheme. This argues for gathering reliable emissions data, developing sophisticated emissions projections, and making transparent assumptions about the impacts of other policies and regulations during the program planning and design phase. However, even with all these attributes, it is still difficult to anticipate every possible outcome. Thus, it is desirable to have robust mechanisms to address the uncertainties of emissions-trading markets and to make midcourse corrections if necessary. Finally, we offer some comments on how to think about the results of ERMS versus a hypothetical command and control program that might have been designed to reach the same environmental outcome.

Suggested Citation

  • Evans, David A. & Kruger, Joseph A., 2006. "Taking up the Slack: Lessons from a Cap-and-Trade Program in Chicago," Discussion Papers dp-06-36, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-06-36
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    References listed on IDEAS

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    Cited by:

    1. Gautier Kohler & Benoit Lefèvre;, 2011. "A comparative analysis of city-based emission trading schemes: key design and management factors for environmental cost effectiveness," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 35(2/3/4), pages 215-241.

    More about this item

    Keywords

    emissions-trading; ERMS; European Union; climate change;

    JEL classification:

    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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