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Climate, Health, and Environmental Justice: Designing Equitable Cap-and-Trade Programs

August 9, 2021

Cap-and-trade systems are market-based approaches to controlling harmful pollutants.

These systems involve establishing a “cap” (or ceiling) on emissions and issuing allowances (or permits for emitting) for a set quantity of emissions that must remain below the cap. Allowances are issued by the government, either for free or by an auction in which revenue is generated to offset emissions, the proceeds of which may be used to fund emissions mitigation actions. The “trade” part of cap-and-trade means that facilities that do not use all of their allowed emissions can sell their allowances to another facility. Conversely, facilities can emit at levels above their allocated emissions by buying additional allowances from other facilities to cover the balance. Facilities can buy and sell allowances amongst themselves, creating a market for allowances with a market-driven price.

This blog post examines how cap-and-trade systems for carbon emissions as they are currently designed do or do not support human health and equity objectives and ways to prioritize environmental justice and equity while designing cap-and-trade systems.

History of Cap-and-Trade for Carbon Emissions in the U.S.

Cap-and-trade systems have been implemented in the U.S. by EPA and several states to reduce emissions. EPA’s Acid Rain Program, which was established in 1995, has used a cap-and-trade structure to achieve significant reductions in sulfur dioxide and nitrogen dioxide emissions. Building off this program’s success, several states have developed cap-and-trade programs to reduce greenhouse gas emissions. The Regional Greenhouse Gas Initiative (RGGI) was established in 2009 as a cooperative effort among 11 Northeastern states to reduce carbon dioxide emissions and has resulted in a 48 percent reduction of average annual CO2 emissions from RGGI electricity generation participants between the base period of 2006–2008 and the period of 2016–2018. California’s cap-and-trade program began in 2013 and is linked to the Canadian province of Quebec’s cap-and-trade program. Washington State passed its own cap-and-trade legislation in May 2021. The Clean Power Plan announced by President Obama in 2015 set the first national standards on carbon emissions from power plants, and allowed states to decide their own pathways to meeting their mandated state-wide goals, including cap-and-trade. Compliance was set to begin in 2022. However, the Clean Power Plan was repealed in 2019.

Recently, the Biden administration announced that it will not try to resurrect the Clean Power Plan and will instead propose a new rule to limit greenhouse gas emissions from power plants. This rule could take many forms, but if it uses the Clean Power Plan as a building block, it may include options for states to adopt cap-and-trade systems. For this reason, it is important for policymakers to examine cap-and-trade through a critical eye in order to build the most effective and beneficial program, especially in light of EPA’s renewed environmental justice and equity priorities following the issuance of Executive Order 14008.

Cap-and-Trade vs. Environmental Justice and Equity

Fossil-fuel power plants produce criteria air pollutants along with greenhouse gas emissions. These co-pollutants have adverse public health impacts, such as premature death, heart attacks, and strokes, as well as harmful effects on the respiratory system, including asthma attacks. When overall carbon emissions are limited through cap-and-trade, co-pollutants are also limited. As a result, cap-and-trade programs produce net health benefits. Abt Associates found that RGGI significantly reduced air pollution from fossil fuel power plants and, from 2009-2014, RGGI resulted in 300-830 lives saved; more than 8,200 asthma attacks avoided; 39,000 lost work days averted; and $5.7 billion in health savings and other benefits. However, this analysis–and most others on cap-and-trade systems–focuses on total net health benefits rather than distributional impacts. And while cap-and-trade programs have shown great potential for reducing overall carbon emissions, these emissions reductions are not evenly distributed geographically.

Heavily polluting power plants can buy emissions credits from cleaner plants, allowing the former to maintain or even increase their emissions, while cleaner plants continue to reduce their carbon output.

From a carbon budget perspective, emissions reductions at any power plant have a global benefit and impacts are distributed equally because carbon is a global pollutant. In other words, reductions in carbon locally decrease the risks of climate change globally. However, uneven reductions between heavily polluting and cleaner power plants can have a significant impact on environmental justice and equity because of the co-pollutants produced by fossil-fuel power plants and their associated health impacts. The power plants with the greatest detrimental impact on public health are disproportionately located in or near communities with large populations of low-income people and people of color. Additionally, vulnerable populations in areas around high-emitting power plants that buy credits to increase production can be hurt by worsening air quality. As a result, the health benefits associated with air quality improvements that arise from cap-and-trade programs have the potential to be inequitable and contribute to environmental injustice. This can be further compounded by the frequent clustering of locally undesirable land uses in these communities (e.g., busy highways that generate pollutants and are often located near high-polluting power plants).

California’s cap-and-trade program has been scrutinized for not addressing health inequities. At the inception of the program, several environmental justice lawsuits were brought against the state on the basis of unequal health impacts. These lawsuits were all dismissed, but environmental justice criticisms of California’s program have remained. Studies of this issue have presented conflicting results. One study of environmental equity in California’s cap-and-trade system found that neighborhoods surrounding facilities that reported increases in carbon and co-pollutant emissions following the adoption of the program had higher proportions of people of color and poor, less educated, and linguistically isolated residents compared to neighborhoods that reported decreases in carbon emissions. However, California’s Air Resources Board (CARB) has stated that the results of that study are inconclusive, and that there is no evidence that the cap-and-trade program has exacerbated local air pollution in environmental justice communities. CARB cited a different study showing air quality in environmental justice communities improved more than air quality in wealthier neighborhoods since the program took effect. Given the unknown impact of California’s cap-and-trade program on equity, state officials recently announced that the state will evaluate the future role of its cap-and-trade program in its climate plan for the next decade.

Before the Clean Power Plan was repealed, environmental justice advocates expressed concern over the potential for health inequities that would result from any cap-and-trade system. An analysis of potential impacts from the Clean Power Plan in Pennsylvania showed that populations living within three miles of coal and natural gas power plants subject to the Clean Power Plan would have a larger percentage of low-income residents than the state median. These communities have a share of racial/ethnic minority residents that is five times larger than the state median. The study found that if Pennsylvania developed a framework to meet Clean Power Plan goals that favored increasing electricity generation at existing natural gas plants rather than replacing production at those plants with renewable generation, low income and minority populations may experience disproportionate negative health impacts.

Ensuring Environmental Justice and Equity in a Cap-and-Trade System

Using the Initiative for Energy Justice’s Energy Justice Scorecard, there are five factors that can determine how well an energy policy addresses equity and justice:

  • Process: Have marginalized communities participated meaningfully in the policymaking process with sufficient support?
  • Restoration: Does the policy aim to remedy prior and present harms faced by communities negatively impacted by the energy system?
  • Decision-making: Does the policy center the decision-making of marginalized communities?
  • Benefits: Does the policy focus on economic, social, or health benefits for marginalized communities?
  • Access: Does the policy make energy more accessible and affordable to marginalized communities?   

When designing cap-and-trade programs, policymakers should consider these factors. The following are specific ways in which they can design cap-and-trade programs to minimize environmental justice impacts and to improve equity while meeting the Energy Justice Scorecard factors:

1. Impose trading restrictions.
Trading restrictions could be used to reduce co-pollutant disparities. Individual emissions caps could be imposed on facilities in polluted areas or areas with a high density of vulnerable populations, preventing these facilities from increasing their overall level of emissions. Alternately, fewer allowances could be distributed to facilities in polluted areas or to facilities that emit co-pollutants at an accelerated rate, and limits could be imposed that would only allow these facilities to buy allowances for a certain percentage of their baseline emissions.

2. Solicit public participation.
Low-income and minority populations should be engaged through various methods of outreach, such as public hearings, mailers, phone calls, information sessions, and online portals for feedback. These communities should be able to express their concerns and offer their input, and program designers should be able to explain how the cap-and-trade system will benefit them. Multiple options for outreach should be employed to ensure that preference is not given to community members who are able to attend in-person meetings. For example, the city of Fayetteville in Arkansas uses an online portal to solicit feedback on local issues from the public in addition to other methods, like in-person meetings and demonstrations.

3. Combine cap-and-trade with direct regulation.
Different forms of direct regulation can be combined with cap-and-trade programs to address environmental justice concerns. One such regulation could require facilities to adopt available “within the fenceline” cost-effective emission reduction mechanisms along with the cap-and-trade trading schemes. This will distribute co-pollutant reduction benefits more equitably than a trading scheme that does not have this additional regulatory element. All facilities will at least be required to adopt certain technologies to provide a minimum level of emissions reductions. This will lessen the impact of allowance purchases.

Additional direct regulation could include states intervening if carbon pricing is not reducing pollution in environmental justice communities. Regulators could impose entity-specific emissions caps if an entity is not reducing emissions in a community that is impacted by health disparities, as is allowed in Washington’s new cap-and-trade program.

4. Oversight of firms in environmental justice communities.
Firms located in areas that are considered environmental justice communities should be closely monitored to ensure they are complying with their facility’s emissions cap and have the appropriate allowances for the amount they are emitting. If trading restrictions are not placed on these facilities, they will at least be subject to more stringent monitoring than facilities outside of polluted communities. Washington’s cap-and-trade program incorporates a monitoring program to regulate local air quality, focusing on overburdened communities.

5. Use program revenue to invest in environmental justice communities.
Auction revenue can be used to subsidize industrial co-pollutant reductions, finance cleaner public or private transportation, or finance other pollution-reducing activities. Additionally, revenue could be used within impacted communities to finance energy efficiency improvements, create green jobs, and subsidize climate adaptation measures. The program revenue from Washington’s cap-and-trade program will be invested in climate change mitigation and carbon emissions reductions. At least 35  percent of investments must target communities overburdened by air pollution and another 10 percent must finance tribal nation-supported projects. Additional sources of revenue could come from luxury taxes (progressive surcharges on the purchase of excessive allowances above the cap) or monetary penalties for excess emissions or through surcharges on allowances or fees in areas highly impacted by air pollution.

Combining Goals

Given that cap-and-trade is likely to remain one of the dominant strategies to address greenhouse gas emissions for the foreseeable future, it is important to consider ways to mitigate potential environmental justice impacts during program design. Ultimately, if cap-and-trade is included in a new rule to limit greenhouse gas emissions from power plants nationwide, some combination of the approaches above will be needed to ensure both equity and environmental goals are achieved.

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