Noting that the two instruments - bubbles and tradable credits - were used only a little or not at all, that the system had major drawbacks, that it was no doubt too close to a system of direct regulation and that the clean air goals were not being attained, the Basle authorities gave thought to the changes to be made to the model so that it could better meet the needs of firms and of environmental protection. To this end, a consulting firm was asked to do a feasibility study (B,S,S. 1995).
The model proposed was very close to the one in use in Southern California (SAQMD 1991 a and b and 1993; Trüeb 1995; Staehelin-Witt 1997). Permits would no longer be defined on the basis of authorised concentrations but rather on quantities actually emitted. At the beginning of the period, the authorities would distribute a quantity of permits compatible with the clean air goal and divide up the rights based on quantities emitted previously ("grandfathering"). Thus, firms opening up new facilities would be obliged to buy permits on the market or engage in internal offsets. In order to increase the number of market players, it was decided to include all stationary sources emitting more than 2 tons. The obligation to announce trades to the regulatory authority and the possibility for that body to veto such a transaction have been maintained. The Environmental Agencies in the two cantons would start by determining the total quantity of VOCs that was compatible with attainment of the air quality standards (ozone and NOx). On that basis, it would set an identical emission reduction rate for all market players. In order to reach this goal over a ten-year period, the quantity of permits allotted to each firm would be gradually reduced. Implementation of the new system would require a change in federal legislation.
As the industry in general and the large firms in particular had already made a major abatement effort, they were against the introduction of the new model. In the major chemical and pharmaceutical firms, any additional emission reductions would result in prohibitive costs, for all economically reasonable abatement measures had already been introduced. Imposing new constraints on these firms could make the region less attractive for the export industry (Staehelin-Witt 1998). On the other hand, the industry would be favourable to replacing emission standards expressed in terms of concentrations by ceilings denominated in kilos or tons. Making such a change to regulations would be tantamount to ensuring that internal trading came into widespread use, since each establishment would by definition form a bubble. It would be necessary in this respect to amend the Federal Clean Air Decree.
A new tax on VOCs is due to go into effort in early 2000. With regard to small sources and diffuse emissions, a tax is certain a more appropriate means than a permit system owing to the significantly lower transaction costs. The bubble is appreciated as an instrument and the major industrial establishments will no doubt continue to rely on it. On the other hand, it is not very likely that credit trading between firms will develop significantly in coming years.
Project to introduce a system of emission trading
in the canton of Valais
In a report addressed to the cantonal authorities, the Air Forum6 proposed a trading system for pollutants enabling a firm to postpone or even forego an abatement effort if a firm from the same area reduced its emissions to below the legal norms (Air Forum 1994b). This would make it possible to attain the air protection goals at a lower cost. An exploratory study on the establishment of a market for tradable permits in the Chablais - an area covering 130 sq. km. on the borders of the cantons of Vaud and the Valais - demonstrated the feasibility of such a project and the reduction in abatement costs resulting from emission trading (Stritt 1997 a and b; Stritt and Jeanrenaud 1992).
1 A NOx trading market in the Chablais
With the support of the Swiss National Fund for Scientific Research7, the University of Neuchâtel set up an exploratory study on the establishment of a market for tradable permits for NOx in the Chablais. This region is situated in the Rhône plain on the territory of the cantons of Vaud and Valais. Surrounded by mountains, it exchanges few pollutants with neighbouring regions. From the point of view of its atmospheric properties, the region is well-suited to the introduction of a system of tradable permits (Stritt 1997a). The purpose of the study was to examine the feasibility of the project, highlight the practical implementation-related problems and estimate the reduction in abatement costs resulting from such trading.
When the study was conducted in 1994, the air quality standards for NOx were not met. Average annual concentrations measured in the region (40g/m3) exceeded the threshold tolerated (30g/m3), while the ceiling not to be exceeded more than once yearly (80g/m3) was not respected in city centres8. A major reduction in VOC and NOx emissions (around 70 per cent) was still needed to attain the ozone emission standard.
The proposed system is similar to the one introduced in Southern California in the early 90s (SCAQMD 1991 a and b and 1993). The market would be open to the 16 firms in the area emitting more than one ton of NOx per year. At the start of each period, the regulator would set the quantity of permits compatible with the clean air goal. Companies starting up new facilities would have to purchase permits on the market. In this way, the cantonal environmental agency would control the total quantity of pollutants emitted by the industrial plants. To calculate the right of each firm to receive permits (initial allocation), the concentrations authorised by the Clean Air Decree (OPair 1992)9 would be converted into tons. In order to avoid an increase in emissions due to a padding effect, the quantities obtained for each establishment would be reduced by a certain percentage. Permits banked for future use would retain their full value (Stritt 1997). The general conditions for the creation of a tradable permit market (characteristics of the pollutant, air quality goal clearly defined by the federal legislation, existence of significant differences in marginal abatement costs, simple and transparent operating rules) are clearly met on the whole. Given the size of the region and the small number of participants, it is clear that we should not expect a real permit market to develop, but rather trading on the basis of bilateral negotiations.
The efficiency gain depends on the differences between marginal abatement costs for the various sources. A 1992 study highlighted significant differences in abatement costs for cleaning up NOx and VOCs in Switzerland (Stritt and Jeanrenaud 1992). In the industrial establishments of the Chablais, marginal costs for reducing NOx emissions range from CHF 11 to over CHF 130 000 per ton. From 1996 to 2000, planned abatement measures in the 16 industrial establishments will make it possible to reduce NOx emissions by 450 tons. If we assume a 1:1 trading ratio, a permit market would make it possible to reduce abatement costs by 60 per cent given the transaction costs. As for permit prices, these would be in the neighbourhood of CHF 3 000 per ton (Stritt 1997).
The study findings aroused the interest of the firms and the environmental protection agencies of both cantons. The government’s desire to require strict compliance with the OPair standards, even if offsets cover facilities located near each other, precludes for the time being the creation of a market for tradable permits in the Chablais. Unlike the Basle case, the cantons of Vaud and Valais have not set emission standards, which would have given the system a certain amount of flexibility. As a result, the idea of introducing a permit market in the Chablais has not been followed up.
2 Regional emission clubs
In a report addressed to the cantonal authorities of Valais, the Air Forum proposed setting up an emission trading system (Air Forum 1994b). The aim would be to create “ regional emission clubs ” offering members the possibility of offsetting overshot emission standards in certain sources with more stringent abatement measures in other facilities in the same region.
The Cantonal Environmental Agency has taken a favourable view of setting up a system for trading pollutants in Valais. To ensure that the proposed solution is in accordance with the spirit of the Clean Air Act, it gives a restrictive interpretation of the notion of emission trading.
Namely :
Exchanges of pollutants should enable firms to “ buy ” an abatement postponement (without however giving up completely on such measures) by making a deal with a firm investing more in abatement than required by the Act;
The definition of regions within which emission trading could take place should be coherent and take due account of the geographical configuration of Valais and meteorological compartments;
Companies subjected to prevention-oriented abatement measures (OPair, Article 8) and those subject to more stringent limits (Art. 32) due to their location in an area with unsatisfactory air quality (Environmental Agency of the canton of Valais) could participate in the trading.
For the cantonal regulatory authority, emission clubs constitute first of all a means of enabling heavily polluting industries to reduce their emissions in an economically efficient way.
The industry supports the idea of setting up emission clubs and the persons consulted generally give a broader interpretation to trading. This should authorise firms to not only postpone but also replace an abatement operation. Regional clubs - a sort of “ bubble ” - covering all sources in a given region - would make for a more effective clean air policy than the one currently pursued. Thought was given to a NOx trade between a major industrial establishment and the incineration plant for household refuse of Upper Valais. The incineration plant would have made a larger investment than the one required by law and the industrial firm could have foregone an extremely costly abatement operation or possibly obtained a postponement for its implementation. Owing to the very strict interpretation of the OPair by the government and its refusal to accept offsets between two sources, even those situated near each other, it has not been possible to follow up on the idea of setting up regional emission clubs - an idea which is on the back burner today.
Conclusion
Analysis of the obstacles to the implementation of tradable emission systems in Switzerland, as well as an examination of the difficulties associated with emission trading in the Basel region, both suggest several useful conclusions for the future. These conclusions relate in particular to the way in which the new instrument is being perceived by businesses; to the interest in permit trading in other regions following the Basel experience; to the poor acceptance of external trading; and to the relationship between emission trading and a stricter use of the "subsidiarity principle" in environment policy.
Increased interest in emission trading
Enterprises are demonstrating increased interest in emission trading. Several environmental managers in large firms would like to see existing emission control systems replaced by a system in which environmental objectives for each plant are expressed in terms of quantities. Such a change would in fact generalise the idea of bubbles.
Increasing awareness of abatement costs
A system allowing internal trading is perceived by business as being very similar to the present regulatory regime, while still allowing significant reductions in abatement costs. Today, enterprises are much more sensitive to the cost of abatement measures than they were ten years ago, when a large programme of air pollution controls was launched (Opair86). All firms now recognise that measures to control air pollution are necessary for the protection of public health and the natural environment, but they are also aware of the importance of the total cost of investments in that abatement effort. Since the marginal costs of abatement are typically higher in those firms which have already undertaken a significant clean-up effort, the cost of compliance with legislation seems disproportioned. Firms no longer hesitate to express their opposition to the strengthening of environmental standard.
Even if the Basel experience has not been as successful as anticipated in terms of the number of exchanges, it has had a demonstration effect, contributing to a better understanding of emission trading systems, not only in the Basel region, but in other areas of the country as well. The idea of creating “emission clubs” in the Valais region would probably never have been suggested if the two Basel cantons had not taken the first step. In the Basel region, firms continue to believe in the utility of emission trading, and, more particularly, in the efficiency of bubbles. These firms would however like to benefit from more flexibility in the achievement of emission standards imposed by the Federal Government.
Permit exchanges which give rise to a payment between firms remain poorly accepted. This basic rejection of market transactions in natural assets rests on moral foundations. In this view, clean air (and indirectly, public health) is a public good, which should remain outside the marketplace. The idea that a firm might discharge its responsibility to protect the environment simply by making a financial payment is not well accepted by a large part of the population. This is certainly one of the reasons why there has not yet been any demand for emission credits in the Basel market.
All initiatives leading toward the introduction of emission trading come from the cantons. This reflects the fact that the Confederation has always been rather reserved concerning the prospects for permit trading, preferring tax incentives instead, since the latter seem more easily adaptable to the present structure of emissions in Switzerland. In practice, however, the cantons have too little flexibility to introduce a system of tradable permits, or any other new instrument for that matter (conventions or contracts, for example). The idea of a stricter application of the subsidiarity principle for pollutants with a local impact-- i.e. where the Federal Government would fix principles and strategies, and where the cantons would be free to choose the means -- therefore merits further examination.
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Working Paper IRER No. 9902
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