Benchmarks

Significant obstacles stand in the way of achieving cost savings that should accrue to market-based emissions trading policies.

Should the U.S. emissions allowance market grow from the current level of $2.5 billion to $20 billion, this would suggest that the United States was successfully reducing emissions of SO₂, NO_X, mercury, and CO₂ at a substantial savings (see sidebar, p. 36). However, there are a number of major challenges confronting the U.S. Environmental Protection Agency (EPA) and market participants that must be successfully managed before the full measure of cost savings can be realized.

The most immediate challenge for maximizing the cost savings from emissions trading is the financial crisis gripping the energy industry. As a result of the Enron debacle and related fallout, many energy companies have ceased to engage in speculative trading. According to a recent article in the Wall Street Journal, Aquila, CMS, Dynegy, El Paso, Reliant, and Williams have exited the power and gas trading market, and presumably have reduced their speculative trading in emissions markets.¹ Thus, the financial crisis has led to a less liquid and more volatile emissions allowance market. As a result, inter-company emissions trading declined by about 40 percent in 2002, and remained about 40 percent below 2001 levels in the first three months of 2003.²