Emission Trading for Small Businesses

by Jack Faucett Associates

2002. [39 pages] 4550 Montgomery Avenue, Suite 300

North Bethesda, Maryland 20814

under contract no. SBAHQ-95-M-0594

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

Emission trading is an economic-incentive-based

alternative to command-and-control regulation. In an

emission trading program, a government or trading

agency issues a limited number of certificates consistent with the desired level of emissions. The sources

of a particular pollutant (most often an air pollutant)

are allotted certificates to release a specified number

of tons of the pollutant. The certificate owners may

choose either to release the pollutants and use the

certificates or to reduce their emissions and sell the

certificates. The fact that the certificates have value

as an item to be sold or traded gives the owner an

incentive to reduce the company’s emissions. When

applied properly, emission trading is intended to be

an economic incentive that can lower the aggregate

cost of meeting local or regional air quality standards

while reducing bureaucratic intrusion into the operation of individual businesses. It is also intended to

provide greater flexibility in meeting production

goals and emission reduction requirements.

Emission trading is potentially relevant to all businesses subject to air, water, and hazardous waste pollution requirements. Such businesses are primarily

manufacturing firms, but some pollution requirements

also apply to farms and to service and retail businesses.

Emission trading promises benefits to those who

participate. This study focuses on two questions:

(1) Will these benefits motivate firms to participate?

(2) Will emission trading provide benefits to small

businesses? This study defines small businesses

as facilities emitting less than 50 tons per year of

an air pollutant.

Scope and Methodology

Approximately 30 emission trading programs

existed or were being developed in the late 1990s.

The researchers studied nine programs that were

deemed representative of the various programs

throughout the United States. After describing each

program, they address three specific questions:

• What impact does the program’s eligibility

requirement have on small businesses?

• How do small businesses learn about the program?

• To what extent is the program utilized, currently

or prospectively, by the small business sector?

Overall Findings

When properly devised, emission trading programs can benefit both small and large firms.

However, in many programs small businesses cannot

realize these benefits because of either restrictions

contained within the regulations or high implementation costs. To serve the interests of small businesses,

a low transaction cost is a necessary attribute in any

emission trading system. Other attributes that help

expand small business participation in trading

include the following:

• The ability to make trades for specific, relatively

short time periods;

• Allowance for shutdown credits;

• Allowance for curtailment credits; and

• The ability to use emission reduction certificates

for a variety of purposes.

Unfortunately, many existing systems do not have

such attributes. For example, the open market trading

rule proposed by EPA disallows source shutdowns
or curtailments as the basis for an emission

trading reduction.

The potential exists for emission trading programs

to benefit small businesses in their roles as buyers

and sellers. However, one question still needs to be

addressed: To what extent are these programs utilized, either currently or prospectively? Emission

trading is still in the nascent stage. Potential benefits

to small businesses exist, but rules and protocol

development will determine whether emission trading is a boon or bust for small businesses.

Highlights

• Most of the emission control equipment and procedures developed to date have been designed for

large emission sources.

• If transaction costs are low enough, small

sources may find it cheaper to purchase emission

reduction certificates from larger sources rather than

install costly controls. In that situation, emission

trading would be providing small businesses with a

lower cost alternative.

• In reality, however, opportunities for small businesses are few. In regions with poor air quality, small

businesses are required to purchase emission reduction

certificates to offset new emissions. The market for

certificates would need to be somewhat efficient for

such transactions to occur. In fact, most new source

revision rules impose high transaction costs on any

emission reduction certificate provider. Small businesses seeking to use these systems are forced into

creating protocols, which may be a costly undertaking.

Ordering Information

The full text of this report and summaries of other

studies performed under contract to the U.S. Small

Business Administration’s Office of Advocacy are

available on the Internet at www.sba.gov/advo/research.

Printed copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Tel. (800) 553-6847

TDD: (703) 487-4639

Order number: PB2002-102232

The National Technical Information Service’s

complete database of federally funded business

research is available on the Internet at www.ntis.gov.