Cap and Trade

We provide Certified Emission Reductions, Emission Reduction Credits, Carbon Dioxide Credits, Tradable Renewable Certificates, and Renewable Energy Credits along with our "Cooler, Cleaner, Greener" Power and Energy Solutions.

From project design and engineering, to financing permitting and installation, we provide turnkey, Renewable Energy Technologies. This includes Solar Water Heating Systems, Solar Electric Power Systems, Solar CHP, Solar Cogeneration and Solar Trigeneration and other energy-saving technologies that may include; Absorption Chillers, Adsorption Chillers, Automated Demand Response, Cogeneration, Demand Response Programs, Demand Side Management, Energy Master Planning, Engine Driven Chillers, Trigeneration and Energy Conservation Measures.

Cogeneration Technologies is located in Houston, Texas. We provide the following power and energy project development services:

• Project Engineering Feasibility & Economic Analysis Studies
• Engineering, Procurement and Construction
• Environmental Engineering & Permitting
• Project Funding & Financing Options; including Equity Investment, Debt Financing, Lease and Municipal Lease
• Shared/Guaranteed Savings Program with No Capital Investment from Qualified Clients
• Project Commissioning
• 3rd Party Ownership and Project Development
• Long-term Service Agreements
• Operations & Maintenance
• Green Tag (Renewable Energy Credit, Carbon Dioxide Credits, Emission Reduction Credits) Brokerage Services; Application and Permitting

We provide "Renewable Energy Technologies" and develop clean power/energy projects that will generate a "Renewable Energy Credit," Carbon Dioxide Credits and Emission Reduction Credits. Through our strategic partners, we offer "turnkey" power/energy project development products and services that may include; Absorption Chillers, Adsorption Chillers, Automated Demand Response, Biodiesel Refineries, Biofuel Refineries, Biomass Gasification, BioMethane, Canola Biodiesel, Coconut Biodiesel, Cogeneration, Concentrating Solar Power, Demand Response Programs, Demand Side Management, Energy Conservation Measures, Energy Master Planning, Engine Driven Chillers, Solar CHP, Solar Cogeneration, Rapeseed Biodiesel, Solar Electric Heat Pumps, Solar Electric Power Systems, Solar Heating and Cooling, Solar Trigeneration, Soy Biodiesel, and Trigeneration.

Unlike most companies, we are equipment supplier/vendor neutral. This means we help our clients select the best equipment for their specific application. This approach provides our customers with superior performance, decreased operating expenses and increased return on investment.

What is the Cap & Trade?

Allowance Trading Basics

Market-based mechanisms for reducing pollution include a variety of economic or market-oriented incentives and disincentives, such as tax credits, emissions fees, or tradeable emissions limitations (emissions trading for short). There are many types of emissions trading approaches; the one used by EPA's Clean Air Market Programs is called "allowance trading" or "cap and trade" and has the following key features:

What is an Emissions Cap?

An emissions "cap": a limit on the total amount of pollution that can be emitted (released) from all regulated sources (e.g., power plants); the cap is set lower than historical emissions to cause reductions in emissions.

• Allowances: an allowance is an authorization to emit a fixed amount of a pollutant
• Measurement: accurate tracking of all emissions
• Flexibility: sources can choose how to reduce emissions, including whether to buy additional allowances from other sources that reduce emissions
• Allowance trading: sources can buy or sell allowances on the open market
• Compliance: at the end of each compliance period, each source must own at least as many allowances as its emissions

What is cap and trade?

Cap and trade is a policy approach to controlling large amounts of emissions from a group of sources at costs that is lower than if sources were regulated individually. The approach first sets an overall cap, or maximum amount of emissions per compliance period, that will achieve the desired environmental effects. Authorizations to emit in the form of emission allowances are then allocated to affected sources, and the total number of allowances cannot exceed the cap.

Individual control requirements are not specified for sources. The only requirements are that sources completely and accurately measure and report all emissions and then turn in the same number of allowances as emissions at the end of the compliance period.

For example, in the Acid Rain Program, sulfur dioxide (SO2) emissions were 17.5 million tons in 1980 from electric utilities in the U.S. Beginning in 1995, annual caps were set that decline to a level of 8.95 million allowances by the year 2010 (one allowance permits a source to emit one ton of SO2). At the end of each year, EPA reduces the allowances held by each source by the amount of that source's emissions.

Why is cap and trade effective?

Cap and trade is effective because:

The cap always protects the environment. As the economy grows, sources must find ways to keep emissions beneath the cap. Complete and consistent emissions measurement and reporting by all sources guarantees that total emissions do not exceed the cap and those individual sources' emissions are no higher than their allowances. The design and operation of the program are relatively simple which helps keep compliance and administrative costs low.

Where has this approach been used successfully?

Cap and trade was first tried in the U.S. to control emissions that were causing severe acid rain problems over very large areas of the country. Legislation was passed in 1990 and the first compliance period was 1995. Sulfur dioxide (SO2) emissions have fallen significantly, and costs have been even lower than the designers of the program expected. The U.S. Acid Rain Program has achieved greater emission reductions in such a short time than any other single program to control air pollution. The Acid Rain Program Progress Report describes the program's successes through 1999.

A cap and trade program also is being used to control SO2 and nitrogen oxides (NOx) in the Los Angeles, California area. The Regional Clean Air Incentives Market (RECLAIM) program began in 1994.

In October, 1998, EPA finalized the "Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone." (Commonly called the NOx SIP Call.) The NOx SIP call was designed to mitigate significant transport of NOx, one of the precursors of ozone. For those States opting to meet the obligations of the NOx SIP call through a cap and trade program, EPA included a model NOx Budget Trading Program rule (Part 96). This trading program was developed to facilitate cost effective emissions reductions of oxides of nitrogen (NOx) from large stationary sources. Part 96 provides sources with a complete trading program including provisions for applicability, allocations, monitoring, banking, penalties, trading protocols and program administration. States choosing to particpate in the NOx Budget Trading Program have the flexibility to modify certain provisions within the model rule.

Why are cost savings so significant?

Cost savings are significant because EPA does not impose specific reductions on each source. Instead, individual sources choose whether and how to reduce emissions or purchase allowances. EPA does not review or need to approve sources' decisions, allowing them to tailor and adjust their compliance strategies to their particular economics.

When is it appropriate to use this policy approach?

This approach is best used when:

• the problem occurs over a relatively large area 
• there are a significant number of sources responsible for the problem 
• the cost of controls varies from source to source, and 
• emissions can be consistently and accurately measured. 

The regulating agency (e.g., EPA) must:

• be able to receive the large amount of emissions and allowance transfer data and quality assure those data 
• be able to determine compliance fairly and accurately 
• strongly and consistently enforce the rule

Cap and Trade

Cap and Trade Is a market based policy tool for protecting human health and the environment. A cap and trade program first sets an aggressive cap, or maximum limit, on emissions. Sources covered by the program then receive authorizations to emit in the form of emissions allowances, with the total amount of allowances limited by the cap. Each source can design its own compliance strategy to meet the overall reduction requirement, including sale or purchase of allowances, installation of pollution controls, implementation of efficienty measures, among other options. Individual control requirements are not specified under a cap and trade program, but each emissions source must surrender allowances equal to its actual emissions in order to comply. Sources must also completely and accurately measure and report all emissions in a timely manner to guarantee that the overall cap is acheived.

A Well Designed Cap and Trade Program Provides:

• Strict Limits on emissions yielding dramatic pollution reductions;
• High levels of compliance, transparancy, and complete accountability;
• Regulatory certainty and complete flexibility for sources;
• Incentives for early pollution reduction and innovations in control technologies;
• Compatibility with state and local programs;
• Significant, widespread, and guaranteed human health and environmental benefits;
• Efficient use of government resources, and
• More benefits at less cost.

Solar Power and Energy

Solar water heating systems use the energy from the sun to heat either water or a heat-transfer fluid in collectors. There are passive systems and active systems. A typical solar water heating system will reduce the need for conventional water heating by at least two-thirds, depending on several factors.

Sometimes the plumbing from a solar water heating system can connect to a house's existing water heater, which stays inactive as long as the water coming in is hot or hotter than the temperature setting on the indoor water heater. When it falls below this temperature, the home's water heater can kick in to make up the difference. High-temperature solar water heaters can provide energy-efficient hot water and hot water heat for large commercial and industrial facilities.

Solar Water Heating Systems

Direct Systems

This system uses a pump to circulate potable water from the water storage tank through one or more collectors and back into the tank. The pump is regulated by an electronic controller, an appliance timer, or a photovoltaic panel.

Indirect Systems

In this system, a heat exchanger heats a fluid that circulates in tubes through the water storage tank, transferring the heat from the fluid to the potable water.

Thermosiphons

A thermosiphon solar water heating system has a tank mounted above the collector. As the collector heats the water, it rises to the storage tank, while heavier cold water sinks down to the collector.

Draindown Systems

In cold climates, this system prevents water from freezing in the collector by using electric valves that automatically drain the water from the collector when the temperature drops to freezing. "Drainback systems," a variation of this approach, automatically drain the collector whenever the circulating pump stops.

Swimming Pool Systems

In solar heated swimming pools, the pool's filter pump pumps water through a solar collector, and the pool itself stores the hot water.

Cooling and heating your building (home, office, school, hospital, etc.) costs you up to 60%, or more, every month you receive your electric bill. You can eliminate the heating and cooling portion of your electric bill forever, and cool and heat your home with the sun's power with our Solar Heating and Cooling system!

Our Solar Heating and Cooling system is the cleanest, greenest, and lowest cost method to cool and warm your home or commercial office or other buildings. Our Solar Heating and Cooling system will eliminate your energy costs for heating and cooling your home, office, school, or any other commercial facility for *free: Requires the purchase of our Solar Heating and Cooling system. Minimum size is 10 tons. You must be located in a qualified geographic location, which means our system must be located to receive direct sunlight. For qualified customers, we will install the system with little to no money down and you pay for the system with the savings our system provides!

Solar Absorption Cooling. Solar heat can be used to displace electricity used for cooling. Absorption chillers use a heat source, such as natural gas or hot water from solar collectors, to evaporate the already-pressurized refrigerant from an absorbent/refrigerant mixture. Condensation of vapors provides the same cooling effect as that provided by mechanical cooling systems. Although absorption chillers require electricity for pumping the refrigerant, the amount is very small compared to that consumed by a compressor in a conventional electric air conditioner or refrigerator. Solar Absorption Cooling systems are typically sized to carry the full air conditioning load during sunny periods.

AN EVALUATION OF CAP – AND -TRADE PROGRAMS FOR REDUCING U.S. CARBON EMISSIONS

June 2001 Preface

Climate change has emerged as an important public policy issue, although the prospects for an international agreement on climate policy are unclear. Several Members of Congress and public interest groups have proposed plans to encourage or require cuts in the United States ' emissions of carbon dioxide, which affect the Earth's climate. This Congressional Budget Office (CBO) study–prepared at the request of the Senate Committee on Environment and Public Works–examines four proposals for reducing those emissions. Each proposal is a variant of a "cap-and-trade" program, in which policymakers would set a mandatory cap on emissions of carbon dioxide and provide companies with economic incentives to reach that cap at the lowest possible cost.

This study evaluates the four proposals using various criteria, including ease of implementation, degree of certainty about achieving the target level of emissions, cost-effectiveness, and distributional effects. The analysis shows how key decisions in the design of cap-and-trade programs affect their performance relative to those criteria. No single proposal stands out in terms of all the criteria considered. Which option policymakers might prefer, if they chose to take action at all, would depend on how they weighed the various performance criteria.

The study was written by Terry Dinan of CBO's Microeconomic and Financial Studies Division, which is directed by Roger Hitchner. Barbara Edwards, Arlene Holen, Deborah Lucas, Robert Shackleton, and Tom Woodward of CBO provided valuable comments and assistance, as did Roberton Williams III of the University of Texas at Austin, Tim Hargrave of the Center for Clean Air Policy, and Dallas Burtraw and Carolyn Fischer of Resources for the Future.

Christian Spoor edited the study, and Christine Bogusz proofread it. Rae Wiseman produced the initial drafts, and Kathryn Quattrone prepared the study for publication. Lenny Skutnik printed the initial copies, and Annette Kalicki prepared the electronic versions for CBO's Web site.

Dan L. Crippen, Director

Contents

SUMMARY

ONE – INTRODUCTION

Climate Change and the Kyoto Protocol The Evaluation Criteria Used in This Study Limits on the Scope of the Study.

TWO – THE IMPLICATIONS OF DESIGN DECISIONS FOR THE PERFORMANCE OF CAP – AND -TRADE PROGRAMS

• Who Must Hold Allowances?
• How Would Allowances Be Allocated?
• Would the Government Set a Ceiling on the Price of Allowances?

THREE – EVALUATION OF FOUR CAP – AND -TRADE PROPOSALS

• Upstream Trading Option I
• Upstream Trading Option II
• Downstream Trading Option I
• Downstream Trading Option II: Electricity-Sector Cap

Conclusions

Summary

Although scientists have known since the 19th century that rising concentrations of "greenhouse gases" in the atmosphere affect the Earth's climate, climate change only recently emerged as an important public policy issue. In 1997, negotiators for the Clinton Administration and more than 80 other countries signed the Kyoto Protocol, in which most industrialized nations agreed to restrict their greenhouse gas emissions to specific levels. If the protocol is ratified, it will require the United States to cut its emissions by 7 percent from the 1990 level. However, no major industrialized nation has yet ratified the agreement, in part because of uncertainty about the potential benefits and costs of reducing emissions and the reluctance of developing countries to participate.

Several Members of Congress and public interest groups have proposed plans to encourage or require cuts in the United States ' greenhouse gas emissions, either before or in the absence of implementation of the Kyoto Protocol or other international agreement. This study examines four such proposals. They focus on emissions of carbon dioxide (referred to here as carbon emissions), which make up the vast majority of greenhouse gas emissions and are the easiest to track.

The proposals are variants of a "cap-and-trade" program, in which policymakers would set a mandatory cap on carbon emissions and provide businesses with economic incentives to reach that cap at the lowest possible cost. Cap-and-trade programs have been used to limit several pollutants in recent years, including sulfur dioxide, which contributes to acid rain.

The Evaluation Criteria Used in This Study

The four proposals examined in this analysis vary greatly in terms of the ease with which they could be implemented, the certainty with which they would achieve the desired cuts in carbon emissions, their cost-effectiveness, and their distributional effects. The Congressional Budget Office (CBO) looked at some of the trade-offs inherent in the proposals by evaluating each option against the following criteria:

• Ease of Implementation. Would the policy be easy to carry out and enforce?
• Carbon-Target Certainty. Would the policy achieve the target level of carbon emissions?

Incremental-Cost Certainty. Would the policy place an upper limit on the cost that the U.S. economy might bear for reducing a unit of carbon emissions? Efforts to cut carbon emissions range from low-cost strategies to high-cost ones. Incremental-cost certainty would be achieved if the policy limited reductions to those below a target cost.

• Cost-Effectiveness. Would the policy reduce carbon emissions at the lowest possible cost to society?
• Distributional Effects. How would the cost and financial benefits of the policy be distributed among U.S. households of different incomes and among U.S. producers?

No one proposal stands out in terms of all the criteria considered. Which option policymakers might prefer, if they chose to take action at all, would depend on the importance they attached to the various performance criteria.

How the four cap-and-trade proposals would measure up against the evaluation criteria would depend on basic decisions about their design. Thus, before examining the actual proposals, CBO looked at the implications of each of those design decisions.

Limitations of the Study

This analysis does not address the issue of taxing carbon emissions. However, the economic impacts of cap-and-trade programs would be similar to those of a carbon tax: both would raise the cost of using carbon-based fossil fuels, lead to higher energy prices, and impose costs on users and some suppliers of energy.

The study also does not discuss the science of climate change or the magnitude and distribution of its economic effects. Nor does it quantify the costs and benefits of each of the proposals examined. Instead, the study indicates whether each proposal could be expected to bring about emission reductions at the lowest possible cost (assuming that policymakers chose to make such reductions).

The Implications of Design Decisions for the Performance of Cap-and-Trade Programs

As usually envisioned, a cap-and-trade program would be mandatory. Policymakers would set a cap on total carbon emissions and require companies to hold rights (or allowances) to the emissions permitted under that cap. Each allowance would entitle the holder to one metric ton of carbon emissions. After an initial distribution of allowances, firms would be free to buy and sell them (the trade part of a cap-and-trade program).

Three decisions about the design of a cap-and-trade program would influence how it would measure up against CBO's evaluation criteria:

• Who would have to hold the emission allowances?
• How would policymakers allocate the allowances and distribute their value?
• Would the government set a ceiling on the price of allowances?
• Who Must Hold Allowances?

A key decision in designing a cap-and-trade program is whether to implement it "upstream," where carbon enters the economy (when fossil fuels are imported or produced domestically) or farther "downstream," closer to the point where fossil fuels are combusted and the carbon enters the atmosphere.

Under an upstream program, producers and importers of fossil fuels would need to hold allowances for the fuel they sold. Their allowance requirements would be based on the carbon emissions that would be released when their fuel was combusted. Under a downstream program, some or all users of fossil fuels would be required to hold allowances. In general, an upstream program would have several major advantages over a downstream program.

Ease of Implementation. Although carbon is ultimately emitted by hundreds of millions of fossil-fuel users–including vehicles, buildings, and factories–it enters the economy through a relatively small number of fossil-fuel suppliers. By placing the allowance requirement upstream on those suppliers, policymakers could cap virtually all fossil-fuel-based carbon emissions in the United States while minimizing the government's administrative costs and the private-sector's reporting costs. Moving the allowance requirement downstream, in contrast, could require monitoring and regulating many more entities. Although a downstream trading program could theoretically cover most carbon emissions, implementing a comprehensive program could prove prohibitively expensive. A downstream program that was restricted to one sector of the economy would be cheaper, but such a program would have other limitations (discussed below).

Carbon-Target Certainty. An upstream cap-and-trade program could ensure that an economywide emission target would be met because it would cover virtually all sources of emissions. In contrast, a downstream system that was not extremely costly could cap only a subset of carbon emissions, while not limiting emissions from sources outside the cap.

Cost-Effectiveness. Ideally, a cap-and-trade program would encourage emission reductions to be made at the lowest cost throughout the economy. An upstream system would limit fossil-fuel production, leading to higher prices for those fuels and for energy-intensive goods and services. The higher prices would give the entire U.S. economy incentives to reduce carbon emissions. Those incentives would result in cost-effective emission reductions: firms and households would decrease their fossil-fuel use if the cost of doing so was less than the cost increase resulting from the higher prices. In addition, the higher prices would encourage the use of existing technologies to improve energy efficiency as well as the development of new ones. A downstream program that was limited to one sector of the economy, in contrast, would encourage reductions from only that sector, and a comprehensive downstream trading program would entail very high administrative costs.

How Would Allowances Be Allocated?

In any cap-and-trade program, policymakers would need to make three decisions about how they allocated allowances. First, would the allowances be sold or given away for free? In this analysis, CBO assumes that if allowances were sold, they would be sold through an auction, which can provide an efficient method of assigning ownership rights. Second, policymakers would need to decide who would receive the value of the allowances. (If allowances were given away, who would get them? Possibilities include consumers and suppliers of fossil fuels as well as workers in affected industries. If allowances were sold, how would the auction revenue be used?) Third, if policymakers chose to give the allowances away to businesses, they would need to decide whether to base the allocation on firms' current or past production (or emission) levels.

Selling the allowances through an auction, as opposed to giving them away, would provide an opportunity to use the auction revenue to lower the overall cost of the cap-and-trade program. However, policymakers would face a trade-off between using the allowances' value to lower that cost and using it to compensate businesses or households that were adversely affected by the policy. Using the allowances' value to compensate parties that had previously benefited from the zero price of carbon emissions (that is, from having no limit on emissions) could lessen concern that the policy would violate principles of fairness. It might also reduce political opposition to the policy.

Reducing the Program's Total Cost. The higher prices for energy and energy-intensive products that would result from a cap-and-trade program would reduce the real income that people received from working and investing, thus tending to discourage them from productive activity. That would compound the fact that existing taxes on capital and labor already discourage economic activity. The cost of that compounding–which is called the "tax-interaction effect"–could be significant. Policymakers could lower the cost of the cap-and-trade policy to the economy if they chose to sell allowances and used the revenue to cut existing taxes. Recent research has focused on the extent to which reductions in taxes on capital and labor could lower the cost of a cut in carbon emissions; it concludes that reducing taxes on capital would be the most effective approach.

Determining the Program's Distributional Effects. Policymakers would decide the ultimate distributional effects of the cap-and-trade program by choosing who would receive the allowances or the auction revenue. Theoretically, a wide variety of distributional effects could be achieved with either auctioning or free allocation.

Excluding the distribution of the allowances' value, a cap-and-trade program would be regressive–that is, the price increases that it provoked would impose a greater relative burden on lower-income households than on higher-income households. Much of the cost of a limit on carbon emissions would be passed on to households through those higher prices. The share of costs not passed on to households would be borne by fossil-fuel suppliers and by industries that use energy intensively. Shareholders and workers in those industries would be adversely affected.

The total value of allowances under a cap-and-trade program for carbon emissions could be substantial–perhaps in the tens to hundreds of billions of dollars. Policymakers could use that value to help offset the distributional effects of a carbon restriction by giving allowances or auction revenue to households and producers in proportion to their share of the policy's cost. Such a strategy would entail giving much of the allowances' value to households, perhaps in the form of equal payments to all U.S. residents from auction revenue. Those payments would be progressive in that they would represent larger percentage increases in income for lower-income households than for higher-income households. Thus, they would tend to offset the regressivity of the policy-induced price increases.

Offsetting the distributional effects would involve giving producers only a portion of the allowances' value because they would be expected to pass a large share of the policy's cost on to consumers. A decision to give all of the allowances to a selected set of firms (such as fossil-fuel suppliers or utilities) would more than compensate them for their costs and could provide them with substantial profits. Those profits would ultimately benefit shareholders rather than consumers in general.

In essence, policymakers would face a trade-off between using the allowances' value to offset the distributional impact of the price increases and using it to offset the overall cost to the economy. For instance, making equal payments to U.S. residents would help offset the price increases but would not offset the tax-interaction effect–and thus would not lower the overall cost to the economy. Lowering existing taxes, in contrast, would reduce the tax-interaction effect, but higher-income households would benefit more than others. The allowances' value would not be sufficient to fully meet all of those goals. Thus, policymakers would have to weigh competing objectives when deciding on the appropriate combination of uses for that value.

Determining Firms' Allowance Allocations. If policymakers chose to give some of the allowances to businesses, would they base those allocations on each firm's current or historical level of production (or emissions)? Assuming that companies sell their products in competitive markets, basing allocations on historical production levels (called grandfathering) would lead to more cost-effective emission reductions. Under grandfathering, the allocation process itself would not influence firms' choices of emission-reduction strategies–instead, they would have an incentive to choose the lowest-cost strategies. In contrast, basing the number of allowances that a firm received each year on the amount that it produced in that year would subsidize production and create greater incentives for some emission strategies than for others. Such an approach would not result in the lowest-cost mix of emission-reduction strategies.

Would the Government Set a Ceiling on the Price of Allowances?

Policymakers could keep the price of allowances from rising above a certain level by agreeing to supply an unlimited quantity of allowances at that price level. The decision of whether to establish such a price ceiling highlights an important trade-off between two of CBO's evaluation criteria: carbon-target certainty and incremental-cost certainty. If policymakers set a cap on carbon emissions but not on the price of allowances, the trading program would reduce emissions to the target level, regardless of the cost to the economy. Placing a ceiling on the price of allowances would set an upper limit on the incremental cost that the United States would bear for reductions in carbon emissions (by limiting reductions to those that cost less than the ceiling), but it would leave the amount of emission reductions uncertain. Such a strategy could help prevent the U.S. economy from incurring higher-than-expected costs. 

Evaluation of Four Cap-and-Trade Proposals

This study examines four specific cap-and-trade proposals in light of the evaluation criteria described earlier. Three of the four options are based on recent legislation or proposals by public interest groups. One is not similar to any current proposal but was designed to highlight certain trade-offs inherent in the actual proposals.

Upstream Trading Option I

This option is similar to the "Sky Trust" proposal promoted by the groups Americans for Equitable Climate Solutions and Resources for the Future. Under this program, CBO assumes, upstream suppliers of fossil fuels would be required to hold allowances, which they would purchase in an auction. The government would set an initial ceiling of $25 per allowance. Auction revenue would be used to make equal payments to U.S. residents and to compensate consumers or companies that were adversely affected by the policy.

Upstream Trading Option II

This option was designed to resemble the previous proposal, with two important differences. First, no ceiling would be set on the price of allowances. Second, auction revenue would be used to reduce corporate income taxes.

Downstream Trading Option I

This option is similar to a proposal by the Progressive Policy Institute. It would initially cap emissions at the current level and then decrease that cap by 1 percent each year. Under this downstream design, large sources of carbon emissions would be required to hold allowances. Each large emitter would be given enough allowances to cover its own estimate of its emissions in the initial year of the program. Those allowance allocations would decline by 1 percent in each subsequent year.

Downstream Trading Option II

Electricity-Sector Cap. This option, which would limit carbon emissions only from the electricity-generating sector, is similar to proposals in three bills that were introduced in the 106th Congress (H.R. 2569, H.R. 2980, and S. 1369). Under this type of program, the government would set a cap on emissions from fossil-fuel-fired electricity-generating units above a given size. Regulators would determine a generation performance standard ( GPS ) for each year by dividing the cap by the amount of electricity that they expected to be generated that year. Each covered generator would receive an annual allocation of allowances equal to the amount of electricity that it generated in that year multiplied by the GPS.

Both upstream trading options would be relatively easy to implement and would create incentives to bring about the lowest-cost emission reductions for the economy (see Summary Table 1). Upstream Trading Option I would limit the incremental cost to the economy of achieving such reductions by capping the price of allowances. Upstream Trading Option II, in contrast, would ensure a given level of emission reductions but could lead to higher-than-expected costs. Option I would use the revenue generated by the allowance auction to offset the distributional impact of the policy-induced price increases, whereas Option II would use that revenue to lower corporate income taxes, thus reducing the overall cost of meeting the carbon target.

Table 1. How Various Cap-and-Trade Options Measure Up Against CBO's Evaluation Criteria
Criterion	Upstream Trading		Downstream Trading
	Option Ia	Option IIb	Option Ic	Option IId
Is Relatively Easy to Implement	Yes	Yes	No	Yes
Provides Certainty About Meeting Carbon Target	No	Yes	Yes for large emitters, No for the economy	Yes for the electricity sector,e No for the economy
Places an Upper Limit on Incremental Cost	Yes	No	No	No
Cost-Effectiveness
Creates incentives for least-cost emission reductions	Yes	Yes	Yesfor capped sources, No for other sources	No
Uses revenue to offset tax-interaction effect	No	Yes	No	No
Distributional Effects
Creates regressive price increases	Yes	Yes	Yes	Yes
Creates windfall gains for selected industries	No	No	Yes	Yes
Overall effect on households	Progressive	Regressive	Regressive	Regressive

SOURCE: Congressional Budget Office.

1. Similar to the "Sky Trust" proposal by Resources for the Future and Americans for Equitable Climate Solutions. Suppliers of fossil fuels would be required to hold emission allowances, which the government would sell by auction with the price per allowance capped. Auction revenue would be distributed evenly to all U.S. residents and to some companies hurt by the policy.
2. Similar to the previous option except that allowance prices would not be capped and auction revenue would be used to cut corporate income taxes.
3. Similar to a proposal by the Progressive Policy Institute. Large sources of carbon emissions would receive allowances free of charge on the basis of their current emissions. Their allocations would shrink by 1 percent per year.
4. Similar to three bills introduced in the 106th Congress (H.R. 2569, H.R. 2980, and S. 1369). Only carbon emissions from electricity generators would be capped. Generators would receive free allowances on the basis of their annual production multiplied by a generation performance standard.
5. Assuming that the government could adjust the generation performance standard each year to maintain the target level of emissions.

Downstream Trading Option I would cover a large and diverse set of emission sources and would therefore be costly and difficult to implement. Because producers would be given all of the allowances, this option would have a regressive distributional effect.

The electricity-sector cap (Downstream Trading Option II) would create a more limited form of downstream trading. Its implementation costs would be lower because a smaller number of entities would be involved and because the electricity sector already participates in other cap-and-trade programs. However, the method of allocating allowances to firms in this proposal–which would be based on their current production levels and a generation performance standard–would tend to increase implementation costs and could boost the cost of emission reductions in the electricity-generating sector. Further, this option would be less cost-effective than an upstream trading program because it would not encourage emission reductions throughout the economy.

Conclusions

This study examines some of the options that the Congress would face should it decide that the potential benefits of reducing greenhouse gases warrant their limitation. In that case, carbon dioxide would be a likely candidate for regulation, since it is both the largest component of greenhouse gases and the easiest to monitor. Cap-and-trade programs for carbon dioxide emissions would merit consideration because such programs have the potential to reduce emissions at the lowest possible cost to the economy.

Policymakers would need to take several trade-offs into account in choosing among alternative designs for a cap-and-trade program for carbon emissions. An upstream design would be relatively simple to implement and could make it easier to achieve a given carbon target at the lowest possible cost to the economy. Moving the allowance requirement downstream would either greatly increase implementation costs–if the program tried to be comprehensive–or entail limiting the program's coverage. If properly designed, a cap-and-trade program that applied only to the electricity-generating sector would be relatively easy to carry out and could minimize the cost of cutting carbon emissions from that sector–but not from the economy as a whole.

Two fundamental decisions that policymakers would have to make in either an upstream or a downstream trading program would be how to allocate the allowances and whether to set a ceiling on their price. Selling the allowances (as opposed to giving them away) would generate revenue that could be used to reduce existing taxes that discourage economic activity. Such a reduction would lower the overall cost of the policy, but it might violate principles of distributional fairness since it would not compensate firms and households that were adversely affected by the carbon cap. Alternatively, policymakers could distribute the auction revenue–or the allowances themselves–in such a way as to offset the distributional effects of the carbon restriction. Setting a ceiling on the price of allowances could ensure that the economy would not incur excessive costs for reducing carbon emissions, but it would mean that a precise level of emissions could not be targeted.

Chapter One

Introduction

Scientists have known for more than a century that rising concentrations of carbon dioxide and other gases in the atmosphere affect the Earth's climate. Human activities are increasing the atmospheric concentrations of those so-called greenhouse gases, thus raising the prospect of human-induced climate change.

The potential effects of rising emissions of greenhouse gases are still very uncertain, as are the appropriate policy responses. Nevertheless, in the 1992 Framework Convention on Climate Change, nearly all of the world's nations agreed to take measures to "prevent dangerous anthropogenic [man-made] interferences with the climate system." Furthermore, in the 1997 Kyoto Protocol to that convention, nearly all industrialized nations agreed to restrict their emissions to specific levels. The United States, for example, would have to cut its greenhouse gases by 7 percent from the 1990 level if the agreement was ratified.

The Kyoto Protocol has not been brought to the U.S. Senate for a vote, and ratification is appearing less and less likely. Nonetheless, some Members of Congress and public interest groups have proposed initiatives to reduce U.S. emissions of greenhouse gases. Those initiatives focus on cutting emissions of carbon dioxide–referred to in this study as carbon emissions–because they make up the vast majority of greenhouse gas emissions and are the easiest to track. This study examines four such proposals using a variety of criteria, including cost-effectiveness and equity considerations. Quantifying the actual costs and benefits of each proposal, however, is beyond the scope of this analysis.

The proposals are variants of "cap-and-trade" programs, which would set an overall cap on carbon emissions and allow suppliers or users of fossil fuels to trade rights (or allowances) for that level of emissions. Cap-and-trade programs have been used in the United States to reduce several air pollutants (including sulfur dioxide, which contributes to acid rain) and to lower the lead content of leaded gasoline.(1) The economic incentives created by such programs are similar to those created by a tax on emissions.

The four proposals examined in this study represent a range of designs for a cap-and-trade program for carbon emissions.

The first option, which is similar to a proposal by the groups Resources for the Future and Americans for Equitable Climate Solutions, would require fossil-fuel suppliers to hold emission allowances. They would buy those allowances in a government auction–with the maximum price capped–and the auction revenue would be distributed to U.S. residents as well as to some companies adversely affected by the policy.

The second option, which was developed by the Congressional Budget Office (CBO) to illustrate potential policy trade-offs, would mirror the first option except that the price of allowances would not be capped and the auction revenue would be used to lower corporate income taxes.

Another option, which resembles a proposal by the Progressive Policy Institute, would give allowances to large emitters of carbon dioxide on the basis of their current emissions and reduce that allowance allocation by 1 percent each year, thus lowering their carbon emissions by 1 percent per year.

A final option, which is based on legislation considered in the previous Congress, would cap carbon emissions only from large electricity-generating plants that use fossil fuels. Those plants would receive an annual allocation of emission allowances.

How those proposals–or any cap-and-trade program for carbon emissions–would measure up according to the evaluation criteria used in this study would depend on basic decisions about the design of the programs. Thus, before evaluating the specific proposals in Chapter 3, this study discusses the implications of various design decisions in Chapter 2.

Climate Change and the Kyoto Protocol

Carbon dioxide in the atmosphere affects temperatures by trapping heat from the sun close to the Earth's surface. It is produced by (among other things) burning any fuel that contains carbon, such as coal, oil, or natural gas. As a result, carbon emissions from human activities increased greatly during the industrial revolution when the use of fossil fuels surged.(2)

For many years, scientists assumed that man-made carbon emissions were being absorbed by the oceans. But that assumption changed in the late 1950s when scientists took measurements in Hawaii and found that atmospheric concentrations of carbon dioxide were rising steadily. Later research revealed that other common gases, such as methane and nitrous oxide, could also affect climate.

By the late 1980s, climate change had emerged as a major political issue transcending national boundaries. In December 1988, the U.N. General Assembly established the Intergovernmental Panel on Climate Change to review scientific data on the subject. The panel's most recent report, issued in 2001, concluded that "there is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities." However, the report also highlighted the many gaps in information and understanding that remain. "Further research is required to improve the ability to detect, attribute and understand climate change, to reduce uncertainties and to project future climate change."(3) In addition, understanding of the potential severity and impact of climate change continues to evolve. Some research has focused on the possible benefits of global warming as well as the potential harm.(4)

The Kyoto Protocol, negotiated in 1997, was the outcome of an attempt to develop an international strategy to address climate change. The protocol covers six greenhouse gases: carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, perfluorinated carbons, and hydrofluorocarbons. Of those, carbon dioxide accounted for more than four-fifths of U.S. greenhouse gas emissions in 1998 (see Figure 1).

Virtually all U.S. carbon emissions result from burning petroleum, coal, and natural gas. Of those three fossil fuels, coal emits the most carbon per amount of heat generated and natural gas the least. For example, carbon emissions would be 77 percent higher if a given amount of heat was generated by coal rather than by natural gas and 25 percent higher if it was generated by petroleum rather than by natural gas. Any attempt to achieve large reductions in U.S. emissions would require shifting from carbon-intensive fossil fuels such as coal to less-carbon-intensive ones such as natural gas. Switching to non-fossil-fuel sources of energy (such as hydropower or nuclear power) or reducing energy use would also decrease emissions.

As of May 9, 2001 , the Kyoto Protocol had been signed by negotiators from the Clinton Administration and from 83 other nations and had been ratified by 34 countries.(5) However, no major industrialized country has yet ratified it. The agreement is intended to take effect 90 days after the 55th government ratifies it, assuming that those 55 countries accounted for at least 55 percent of the carbon emissions of developed nations in 1990.

The Kyoto Protocol has not been sent to the U.S. Senate for ratification, and recently, the Bush Administration announced its intention to withdraw its support for the agreement, citing concerns about the potential cost to the U.S. economy and the lack of participation by large developing countries (such as China). Reducing greenhouse gases would be relatively inexpensive in those countries, where fossil fuels are used inefficiently. Thus, the cost of meeting its own emission target would be significantly lower if the United States could do so in part by financing low-cost emission reductions in developing nations.(6) But developing countries fear that limits on emissions would impede their growth.

Although the prospects for an international agreement on climate policy are unclear, initiatives to cut U.S. emissions of greenhouse gases continue to be debated. Those initiatives could be implemented prior to, or in the absence of, an international agreement.

The Evaluation Criteria Used in This Study

Different programs to reduce carbon emissions would vary in terms of the ease with which they could be implemented, the certainty with which they would meet an emission target, the cost-effectiveness of the emission reductions, and their effects on businesses and households. This study highlights those differences by examining the performance of carbon-reducing initiatives according to five criteria:

• Ease of Implementation. Would the policy be easy to carry out and enforce?
• Carbon-Target Certainty. Would the policy achieve the target level of carbon emissions?
• Incremental-Cost Certainty. Would the policy place an upper limit on the cost that the U.S. economy might bear for reducing a unit of carbon emissions? Efforts to cut carbon emissions range from low-cost options to high-cost ones. Incremental-cost certainty would be achieved if the policy limited reductions to those below a target cost.
• Cost-Effectiveness. Would the policy achieve carbon reductions at the lowest possible cost to society? The answer depends on two more questions: would the policy provide an incentive to bring about the lowest-cost reductions in carbon emissions, and would the value of the allowances be captured by the government and used to lower existing taxes?
• Distributional Effects. How would the cost and financial benefits of the policy be distributed among U.S. households at different income levels and among U.S. producers?

Limits on the Scope of the Study

In focusing on cap-and-trade programs–which have been successful at reducing other pollutants in a cost-effective manner–this study does not examine the full range of policies that could be used to cut carbon emissions. For example, it does not consider command-and-control regulations, which might prescribe firm- or industry-specific technologies. This study also does not consider taxing carbon emissions; however, it points out similarities between carbon taxes and cap-and-trade programs for carbon emissions. For example, both policies would raise the cost of carbon emissions, lead to higher prices for fossil fuels, and impose costs on energy users and suppliers of carbon-intensive energy.

Further, this study does not look at how various policies might promote carbon sequestration–the absorption of carbon dioxide by trees, plants, and soils. Some policies could offset U.S. carbon emissions by encouraging changes in land use and forest management that would lead to greater levels of sequestration. To the extent that options for low-cost carbon sequestration were available, they could be relatively efficient. However, measuring baselines for carbon sequestration would be difficult, and incorporating sequestration into policy initiatives would raise the administrative and implementation costs of the policy considerably.

A primary motivation for reducing carbon emissions is to achieve positive net benefits for the United States –that is, benefits greater than costs. However, determining whether the proposals would generate positive net benefits is beyond the scope of this study. Rather, this study considers the narrower question of whether a particular program would be cost-effective–that is, would bring about carbon reductions at the lowest possible cost to the U.S. economy (given the objective of reducing carbon emissions).

Finally, this study provides qualitative but not quantitative evaluations of the cap-and-trade proposals. For example, it indicates whether a proposal would encourage the lowest-cost reductions in carbon emissions but does not estimate the proposal's actual cost. Likewise, CBO estimates whether proposals would adversely affect lower-income households but does not quantify how much various households would actually gain or lose as a result of different programs.(7)

• The concept of distributing tradable pollution rights–what this paper refers to as emission allowances–first appeared in the academic literature in 1968; see J.H. Dales, Pollution, Property and Prices (Toronto: University of Toronto Press, 1968). Trading programs can be attractive alternatives to command-and-control approaches because they can lower the cost of achieving an environmental goal by giving participants some flexibility; see David W. Montgomery, "Markets in Licenses and Efficient Pollution Control Programs," Journal of Economic Theory, vol. 5 (1972), and Tom H. Tietenberg, Emissions Trading: An Exercise in Reforming Pollution Policy (Washington, D.C.: Resources for the Future, 1985). For a recent overview of the use of cap-and-trade programs in the United States, see Environmental Protection Agency, The United States' Experience with Economic Incentives for Protecting the Environment, EPA-240-R-01-001 (January 2001).
• For a more detailed discussion of the science and politics of climate change, see J.W. Anderson, The Kyoto Protocol on Climate Change: Background, Unresolved Issues and Next Steps (Washington, D.C.: Resources for the Future, January 1998). Much of this discussion was drawn from that report.
• See United Nations Intergovernmental Panel on Climate Change, "Summary for Policymakers: A Report of Working Group I of the Intergovernmental Panel on Climate Change" (available at www.ipcc.ch/pub/spm22-01.pdf).
• For a review of the research, see Robert Mendelsohn, The Greening of Global Warming (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1999).
• See United Nations Framework Convention on Climate Change, "Kyoto Protocol Status of Ratification" (available at www.unfccc.int/resource/kpstats.pdf).
• Global temperature levels are affected by the total amount of carbon dioxide in the atmosphere, so foreign emission reductions should be just as effective as U.S. emission reductions. If international trading of carbon allowances occurred, the United States could receive credit toward its domestic limit by purchasing low-cost foreign emission reductions.
• For a discussion of that issue, see Congressional Budget Office, Who Gains and Who Pays under Carbon-Allowance Trading? The Distributional Effects of Alternative Policy Designs (June 2000).

Chapter Two

The Implications of Design Decisions for the Performance of Cap-and-Trade Programs

As generally proposed, a cap-and-trade program would be mandatory. Policymakers would set a cap on total U.S. carbon emissions and require companies to hold allowances to the emissions permitted under that cap. Each allowance would entitle the holder to one metric ton of carbon emissions. After an initial distribution of allowances, the holders would be free to buy and sell them. The allowances' value would stem from the limitation on the amount of carbon emissions. Thus, as with a tax, the production of carbon dioxide would be costly to entities affected by the regulation.

Three decisions about the design of a cap-and-trade program would influence how it would measure up against the Congressional Budget Office's evaluation criteria:

• Who would be required to hold the carbon allowances?
• How would the allowances be allocated? First, would they be sold or given away for free? Second, who would receive their value? (If policymakers decided to sell allowances, to whom would they distribute the resulting revenue? If they gave allowances away, who would receive them?) And third, if policymakers chose to give allowances away to businesses, would the companies' allocations be based on their past or current production (or emission) levels?
• Would the government set a ceiling on the price of allowances?
• Who Must Hold Allowances?

Carbon is a component of fossil fuels. It enters the economy when those fuels are imported or produced domestically and is emitted when they are burned. A key decision in designing a cap-and-trade program is whether to implement it "upstream," where carbon enters the economy, or farther "downstream," closer to the point where it is emitted into the atmosphere.

Under an upstream program, the producers and importers of fossil fuels would be required to hold allowances based on the carbon content of their fuel–that is, the carbon emitted when the fuel is combusted. Requiring that companies hold an allowance for each ton of carbon introduced into the economy is equivalent to requiring an allowance for each ton of carbon emitted into the atmosphere. The reason is that there are no economically viable methods (such as scrubbing emissions from smokestacks) for reducing the amount of carbon emissions per unit of fuel combusted.

A downstream program could take numerous forms, with various users of fossil fuels required to hold allowances. The choice of whether to implement a cap-and-trade program upstream or downstream has implications for three of the evaluation criteria used in this study: ease of implementation, carbon-target certainty, and cost-effectiveness. In all of those areas, an upstream design offers several advantages.

Ease of Implementation

Although carbon dioxide is emitted by hundreds of millions of fossil-fuel users (everything from power plants to automobiles), it enters the economy through a relatively small number of fossil-fuel suppliers. By placing the allowance requirement upstream on those suppliers, the government could cap virtually all fossil-fuel-based carbon emissions in the United States while minimizing both its administrative costs and the private sector's reporting costs (such as for documenting suppliers' allowance requirements and transactions). The Center for Clean Air Policy estimates that such a program would require less than 2,000 entities to hold allowances.(1) Those entities would include petroleum refineries, oil importers, natural gas pipelines, natural gas processing plants, coal preparation plants, and coal mines whose production bypasses preparation plants. Implementing such a program would be relatively easy because regulators could determine each supplier's allowance requirements on the basis of information about the amount and type of fuel that it sold in the United States.

Moving the allowance requirement downstream could require monitoring and regulating many more entities. The United States contains roughly 380,000 industrial establishments, millions of commercial buildings, and hundreds of millions of homes and automobiles.(2) The farther downstream the allowance requirement was placed, the larger the number of entities that would have to be regulated.

Although a downstream trading program could theoretically cover most sources of carbon emissions, the cost of implementing a comprehensive downstream program could be prohibitive. Alternatively, the cost of implementing a downstream program that was limited to the electricity sector would be low, but such a program would cover only about 40 percent of carbon emissions (see Table 1). Limited coverage would decrease both the likelihood that the program would meet an economywide emission target and the cost-effectiveness of the emission reductions.

Table 1. U.S. Fossil-Fuel-Related Emissions of Carbon Dioxide, by Sector, 1998
Sector	Including Each Sector's Emissions Associated with Electricity		Excluding Each Sector's Emissions Associated with Electricity
	Amount of Emissions (Millions of metric tons)	Percentage of U.S. Total	Amount of Emissions (Millions of metric tons)	Percentage of U.S. Total
Residential	285	19	93	6
Commercial	238	16	60	4
Industrial	478	32	299	20
Transportation	485	33	484	33
Electricity	n.a.	n.a.	550	37
Total	1,486	100	1,486	100

SOURCE: Congressional Budget Office based on information from Department of Energy, Energy Information Administration, Annual Energy Review 1999.

NOTE: n.a. = not applicable.

Carbon-Target Certainty

An upstream cap-and-trade program could ensure that an economywide emission target would be met because it would cover virtually all carbon emissions.(3) A downstream program, in contrast, could realistically cap only a subset of carbon emissions, while not limiting emissions from sources outside the cap. Those outside emissions could increase as a result of economic growth or of unintended incentives that the program would create to shift fossil-fuel combustion to uncapped sectors. "Leakage" would occur if firms or households were able to lower their costs by shifting from regulated sources of fuel to unregulated ones.(4) For example, a cap on carbon emissions from the electricity sector that only covered utilities could lead to leakage: a facility in the industrial sector could choose to generate electricity on-site rather than purchase it from a utility that had higher costs–and higher prices–because of the cap.(5)

Cost-Effectiveness

An upstream cap-and-trade program would create price increases that would encourage reductions in carbon emissions throughout the economy. That economywide incentive to reduce carbon emissions would ensure that reductions were made at the lowest possible cost.

The carbon cap would limit production of carbon-based fossil fuels and would cause the price of those fuels to rise–with price increases reflecting each fuel's allowance requirements and, hence, its carbon content.(6) Those price increases would raise firms' and households' costs, encouraging them to decrease their consumption of fossil fuels and energy-intensive goods and services. (For example, households might drive less, and utilities might replace coal with lower-carbon-emitting fuels, such as natural gas or renewable sources of energy.) As a result, households and businesses throughout the economy would have an incentive to reduce all forms of carbon consumption and thus carbon emissions. Higher prices would not only encourage the use of existing technologies but would also provide an incentive for innovations to improve energy efficiency. (Similar economic incentives would result from a tax on the carbon content of fossil fuels.)

In contrast, a sector-specific (or otherwise limited) downstream trading program would confine incentives for cutting carbon emissions to one sector, although potentially lower-cost reductions could have been obtained from sources outside that sector. For example, a downstream system that was limited to electricity generators would not encourage emission reductions in the transportation sector, which accounts for roughly one-third of carbon emissions. Furthermore, as noted earlier, the cost of implementing a comprehensive downstream trading program could be prohibitive.

How Would Allowances Be Allocated?

In any cap-and-trade program, policymakers would need to make three decisions about how they allocated emission allowances. First, would allowances be sold at auction (like licenses to use the electromagnetic spectrum), given away for free (like allowances for sulfur dioxide), or some combination of the two? Second, how would the value of the allowances be distributed? If the government gave allowances away, who would receive them? If it sold allowances, who would benefit from the resulting revenue? Third, if policymakers chose to give some of the allowances to companies, how would they determine those companies' allocations?

Auction Versus Free Distribution

Auctioning off emission allowances–as opposed to giving them away–would provide policymakers with an opportunity to use the auction revenue to lower the overall cost of the cap-and-trade program. How would that work? As described above, a cap-and-trade program would cause the relative prices of energy-intensive goods to rise. Those higher prices would reduce the real income that people received from working and investing, thus tending to discourage them from productive activity. That would exacerbate the discouraging effect that existing taxes on capital and labor already have on productive activity. The exacerbation of existing tax distortions–called the tax-interaction effect–is difficult to measure but could be significant (see Box 1).

Box 1

How Much Would the Cost of a Cap-and-Trade Policy Decline If the Allowances' Value Was Used to Cut Taxes?

The tax-interaction effect increases the overall cost to the economy of a cap-and-trade policy by discouraging economic activity. Some recent studies conclude that the tax-interaction effect could substantially boost the cost of limiting carbon emissions. For example, one study estimates that the cost of a 15 percent decrease in carbon emissions would be 2.6 times higher if the tax-interaction effect was taken into account than if it was ignored.

Policymakers could lower the overall cost of the policy by using the value of the emission allowances to offset the tax-interaction effect. One study estimates that the overall cost of a carbon limit could be cut by more than 40 percent if the value of the allowances was used to reduce individual income taxes.2 The results are even more dramatic when the researchers assume that the allowances' value would be used to reduce corporate income taxes. In that case, they concluded, the cost imposed on the economy would fall by more than 50 percent.3 Another study estimates that the cost of a 15 percent decrease in carbon emissions would be more than 50 percent lower if policymakers used the allowances' value to offset existing taxes on labor (rather than giving the allowances away).4 However, those studies do not examine how the effects of the policy would be distributed, so they neglect the fact that some people would be worse off despite the cost reduction.

Quantifying the tax-interaction effect and the extent to which it would be offset by cuts in existing taxes is difficult. The numbers discussed above are based on simplified models of the economy and on assumptions about how investment and labor would respond to changes in tax rates. Thus, they should be viewed as rough estimates.

• See Ian H. Parry and others, "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, vol. 37, no.1 (January 1999), pp. 52-84.
• See A. Lans Bovenberg and Lawrence Goulder, Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does it Cost? Working Paper No. 7654 (Cambridge, Mass.: National Bureau of Economic Research, April 2000). Their estimate was based on a carbon tax of $25 per metric ton (or equivalently, an auction in which the price of an allowance was $25). The gains were measured relative to the case in which the allowances' value was not used to encourage economic activity. That would occur if the government gave the allowances away or auctioned them off and made lump-sum payments to households or citizens.
• The cost per ton of carbon emissions reduced was $102.60 in the base case, $60 when auction revenue was used to decrease individual income taxes, and $47.70 when auction revenue was used to lower corporate income taxes.
• See Parry and others, "When Can Carbon Abatement Policies Increase Welfare?"

Policymakers could at least partially offset the tax-interaction effect, and thus lower the cost of the cap-and-trade program, if they sold some of the allowances and used the revenue to lower the existing taxes whose distortions the program would exacerbate. Recent research has focused on the extent to which reductions in marginal tax rates on capital and labor income could offset the tax-interaction effect; it suggests that cuts in marginal tax rates on capital income (such as capital gains taxes and corporate income taxes) would produce the largest offsets. In contrast, no such cost reduction would be realized if the government gave the allowances away or auctioned them off and used the revenue to provide direct payments to businesses or individuals. Neither of those uses of the allowances' value would provide households with an additional incentive to work or invest.

Determining the Program's Distributional Effects

Restricting carbon emissions would impose costs on consumers and producers of some fossil fuels and energy-intensive goods and services. At the same time, the allowances (by permitting companies to produce or consume fossil fuel) would be valuable–worth tens or even hundreds of billions of dollars. Policymakers would determine the ultimate distributional effects of the cap-and-trade program by choosing whom to give the allowances or auction revenue to. Theoretically, the distribution of value could be similar under either method of allocation, since providing target groups with money from the auction or with allowances would be equivalent. (The practicality of providing different target groups with allowances or auction revenue might vary, but that issue is not addressed in this study.) However, the decision about whether to sell allowances or give them away would have varying implications for the federal budget (see Box 2).

Box 2

The Budgetary Treatment of Different Types of Federal Programs to Limit Carbon Emissions

The way in which the federal budget would treat programs to limit carbon emissions would depend primarily on whether the programs caused money to flow into or out of the government. Money would flow into the government if emission allowances were sold (as specified in some proposals) rather than given away (as specified in others). If allowances were sold, the revenue would show up in the budget as collections. If that revenue was spent, the expenditures would appear in the budget as outlays.

If allowances were given away, in contrast, there would be no flow of funds into the government, and the program would probably not be included in the budget. Spending on activities to monitor and enforce the program would appear in the budget, but private transactions involving the trading of allowances would not. Consistent with that approach, private trading of grandfathered allowances to emit sulfur dioxide (issued to comply with the 1990 amendments to the Clean Air Act) does not appear in the federal budget.

In some cases, private financial transactions would appear in the budget because of the high degree of government control over the activity. Examples include the transactions of the health alliances that the Clinton Administration proposed in the Health Security Act of 1994 and the assessments on, and subsidies to, private telecommunications carriers under the Telecommunications Act of 1996, which seeks to provide service to customers who would otherwise be unprofitable to serve. In other cases, the government imposes regulations and mandates on private entities that result in costs and provide benefits; however, the degree of government control over the private activity falls short of the threshold necessary to classify those private transactions as federal. The budgetary treatment of a specific cap-and-trade program for carbon emissions would depend on the details of the legislation that created the program and the extent of federal involvement.

• Less than 3 percent of the sulfur dioxide allowances issued annually are auctioned. Those auctions are conducted for the Environmental Protection Agency by the Chicago Board of Trade. Auction proceeds are returned on a pro rata basis to the electricity-generating units that receive allowances through the grandfathering process. The auction revenues are held in a deposit account until they are distributed and are not counted as collections in the federal budget.
• The Office of Management and Budget ultimately determines budgetary treatment, although CBO has an advisory role in such decisions. See Congressional Budget Office, The Budgetary Treatment of Personal Retirement Accounts (March 2000), for a more complete discussion of how budgetary treatment is determined.

Distributional Effects of the Cap on Carbon Emissions. Excluding the government's distribution of the allowance value, a cap-and-trade program would be regressive–that is, it would impose a greater relative burden on lower-income households than on higher-income households. Much of the cost of the program would be borne by consumers in the form of higher prices for fossil fuels and energy-intensive goods and services. Those price increases would be regressive for two reasons. First, lower-income households generally spend a larger share of their income than higher-income households do, and second, a greater percentage of their income is spent on energy products (such as gasoline, electricity, and fuel for heating and cooking).

The share of price increases that was not passed on to consumers would be borne by producers of carbon-intensive goods and services. Households would incur those costs if they owned stock in companies that suffered from reduced demand for their products because of higher fossil-fuel prices. Suppliers of high-carbon-content fuels (such as coal), for example, might retire their capital equipment early and expect lower future profits as they moved to lower levels of production. If companies could not pass those costs on to consumers, shareholders would ultimately bear them.(8) At the same time, the price increases could help other shareholders. For example, shareholders of natural gas refineries could benefit as the demand for natural gas rose because of the policy.

In addition, members of households might incur costs through their role as workers. Employees in carbon-intensive industries–such as the coal industry–could lose their jobs as a result of lower demand for those products, and wages in those industries could be temporarily depressed.

Distributional Effects of the Decision About Allocation. Policymakers could determine the ultimate distributional effects of the cap-and-trade policy by their decision about who would receive the allowances or auction revenue. First, consider a case in which the allowances were given away. The government would not need to give them to the same entities that it required to hold the allowances. For example, it could require fossil-fuel suppliers to hold allowances (to minimize implementation costs) and could give the allowances either to those suppliers, to intermediate producers that use fossil fuels, or even to households. Some recent studies indicate that the value of the allowances that fossil-fuel suppliers would receive if policymakers gave them all of the allowances would far outweigh their share of the cost of a carbon cap–creating substantial windfall gains (see Box 3).(9) Likewise, policymakers would create windfall gains for intermediate producers if they chose to give them all of the allowances. In either case, the windfall gains would ultimately benefit shareholders, who disproportionately are higher-income households. Thus, those allocation strategies would add to the regressivity of the price increases.

Box 3

Estimates of Companies' Windfall Gains from Receiving Allowances for Free

If the government distributed emission allowances to companies on the basis of their past emission or production levels (a process known as grandfathering), existing firms would capture the value of the allowances. For example, suppose the government required fossil-fuel producers to hold allowances but grandfathered them. The limited number of allowances would restrict fossil-fuel production and lead to higher prices. Producers that received allowances would reap the benefits of those higher prices but would not have had to pay for the allowances. New entrants to the industry, in contrast, would have to buy allowances from existing firms. Because the existing firms' allowance allocations would be independent of their production decisions, they would not have an incentive to lower prices and pass the value of the allowances on to consumers.

The total value of the allowances under a cap-and-trade program for carbon emissions could be large. Thus, the decision to grandfather all of the allowances to a specific set of firms could provide them with substantial profits, typically referred to as windfall gains. One study estimates that the present discounted value of the allowances that coal producers would receive if the government gave away allowances to fuel suppliers would be $119.5 billion, assuming an allowance value of $25 per metric ton of emissions. The study estimated that equity values in the coal industry would rise by more than 1,000 percent as a result of that windfall gain.

Another study examined a scenario for implementing the Kyoto Protocol in which the electricity sector would be allocated allowances on the basis of its 1990 emissions. Assuming an allowance price of $75 per metric ton of carbon emissions, that study estimated that the electricity sector would receive $28 billion worth of allowances annually (in 1990 dollars). By comparison, the net operating income of investor-owned utilities (which account for about 75 percent of revenue in the electricity-generating industry) was $34.6 billion in 1990.

• A. Lans Bovenberg and Lawrence Goulder, Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does it Cost? Working Paper No. 7654 (Cambridge, Mass.: National Bureau of Economic Research, April 2000). That estimated increase in equity value is net of the adjustment costs that firms would incur as well as their increased tax payments.
• H. John Heinz III Center for Science, Economics and the Environment, Designs for Domestic Carbon Emissions Trading (Washington, D.C.: Heinz Center, September 1998), p. 48.

Alternatively, consider a case in which the government sold the allowances to fossil-fuel suppliers through an auction. The resulting revenue could be distributed to producers, consumers, or some combination in such a way as to replicate the distributional effects of giving allowances away.

Alternative uses of the revenue would benefit households in various income brackets differently and have disparate effects on the overall cost of the policy. In general, policymakers would face a trade-off between using the revenue to offset the distributional impact of the carbon cap and using it to offset the overall cost to the economy. For instance, to help offset the distributional impact, part of the auction revenue could be used to make equal payments to U.S. residents and part could be used to compensate affected producers.(10) Such a strategy, however, would not offset the tax-interaction effect. In contrast, policymakers could reduce that effect–and thus lower the overall cost of the policy–if they used auction revenue to cut existing taxes on capital (see Box 1). In that case, however, higher-income households would tend to reap the benefits.

Policymakers could opt to employ a combination of strategies. They might choose to give away a portion of the allowances to affected firms (to compensate them for their share of costs) and auction off the rest. They might choose to target some of the auction revenue toward lower-income households (to offset the regressivity of the policy-induced price increases) and use the remaining share to decrease existing taxes (to lower the overall economic cost of the policy).

Allocating Firms' Allowances: Grandfathering Versus Using Current Production

If policymakers opted to give allowances to firms, they would need to choose a method for determining how many allowances each firm would receive. Two ways, which are included in the proposals discussed in Chapter 3, are to base those allocations on firms' past production or emission levels (called grandfathering) or on their current production levels (called output-based allocations).(11) Under grandfathering, companies could not alter the number of allowances they received by changing their current level of production; hence, the allowance allocation would not affect firms' production decisions. Under output-based allocations, in contrast, each company's annual allocation would be based on its production level in that year; thus, the allowance allocation would influence firms' current and future decisions about production.

Distributing allowances through output-based allocations instead of grandfathering would lead to higher implementation costs and could increase the economywide cost of achieving a given level of emission reductions. Further, it would reduce the windfall gains that existing firms in the industry would receive. This section compares the two allocation methods for a cap-and-trade program that is limited to the electricity sector. (An electricity-sector cap that uses output-based allocations is one of the proposals discussed in Chapter 3.)

Ease of Implementation. The government's implementation costs for reaching a given emission target for the electricity sector would be higher with output-based allocations than with grandfathering. Implementing grandfathering would require setting the cap on carbon emissions and dividing that fixed amount of emissions among existing firms on the basis of their production (or emissions) in a historical base year. In contrast, implementing a system of output-based allocations would involve dividing the carbon cap by the amount of electricity production expected–that is, determining the allowed number of emissions per unit of output, a number referred to here as a generation performance standard ( GPS ). The number of allowances each company received in a given year would be equal to the amount it produced in that year multiplied by the GPS. Firms would need to buy allowances if their allowance requirement (equal to the carbon emissions from the electricity they produced) was greater than their allocation. Firms with excess allowances could sell them.

To maintain a given carbon target with output-based allocations, the government would need to predict how production would vary from year to year and adjust the GPS accordingly. As described below, the allowance-allocation process itself would influence firms' production decisions, so regulators would need to account for that as well as for other factors that would affect total production.

Cost-Effectiveness. Ideally, a cap-and-trade program for the electricity sector would minimize the cost of meeting a given carbon target for that sector (in other words, it would be what this study refers to as the least-cost solution). A condition for cost minimization is that the policy must provide equal incentives for businesses and households to engage in all forms of carbon-reducing activities; it should not provide greater incentives for some activities than for others. Provided that electricity is sold in a competitive market, a cap-and-trade program in which allowances were grandfathered to existing firms would meet that condition, whereas a program in which allowance allocations were based on firms' current production would not.

Although only part of the electricity market has been deregulated–and thus has competitive pricing–the nation is moving in that direction. So far, 24 states have enacted restructuring legislation that would deregulate their electricity markets, and all but eight states are investigating restructuring.(12) The following comparison of the cost-effectiveness of grandfathering and output-based allocations assumes competitive pricing. (Although such a comparison may be instructive, one recent study concludes that grandfathering may not be more cost-effective than output-based allocations when only part of the electricity market is deregulated.(13) Under those conditions, the cost-effectiveness of the two allocation mechanisms would be close; which one was more cost-effective would depend on the level of the carbon cap.)

Under grandfathering, the allowance requirement would cause firms' production costs to increase in proportion to the carbon emissions resulting from the electricity they produced. Firms would tend to pass those higher costs on to households in the form of higher prices. The increase in firms' costs–and resulting increase in electricity prices–would uniformly encourage all methods of reducing carbon emissions from electricity generation, including using less electricity (such as by installing more efficient lighting or turning off lights when not in use) and producing electricity from fuels with a lower carbon content (such as using more natural gas and less coal). The amount of allowances that each firm received would be independent of the electricity it produced. Thus, the allocation process would not distort choices about how to reduce carbon emissions, and the cap-and-trade program would result in the least-cost solution to the problem of cutting emissions.

Under output-based allocations, the allowance requirement would similarly tend to increase businesses' production costs. As opposed to the case with grandfathering, however, a company could increase the number of allowances it received by increasing the amount of electricity it produced–thus, the allowance allocation itself would subsidize electricity production. As a result of that subsidy, electricity prices would increase less under output-based allocations than under grandfathering. Lower electricity prices would mean that the policy would not give firms and households as much incentive to limit their electricity use. Output-based allocations would also result in a greater reliance on natural gas for electricity generation than would occur under the least-cost solution because the amount of allowances that a firm would receive from producing a unit of natural-gas-fired electricity (the output subsidy) would be greater than the amount of allowances required for such production.

In summary, output-based allocations would distort choices about how to lessen carbon emissions, favoring some methods over others. Those distortions would prevent emissions from being reduced at the lowest possible cost.

Concern that grandfathering could discourage companies from cutting emissions before a cap-and-trade program took effect has prompted some legislators and groups to propose issuing early-reduction credits. Those credits have several disadvantages, however (see Box 4). Instead, disincentives for early emission reductions could be avoided by designing the allocation method carefully.

Box 4

Early-Reduction Crediting

Some proposals for cap-and-trade programs include the use of early-reduction crediting to reward firms that cut their emissions before the program goes into effect.1 A company would earn a credit for each eligible metric ton of carbon emissions that it reduced voluntarily. The credit would then entitle the firm to some quantity of allowances once the cap-and-trade program was operating.

A primary advantage of early-reduction crediting is that it could keep firms from delaying capital investments to reduce their emissions. (Such delays could occur if lowering emissions would also lower their allowance allocations.) However, early-reduction crediting could create unintended distributional effects and be difficult to implement. Furthermore, a cap-and-trade program could be designed so as to avoid giving companies an incentive for delay.

Firms would be discouraged from making early emission reductions only under specific conditions: if their allowance allocations were based on their actual emissions in a current or future base year. In that case, decreases in emissions before the base year would also reduce firms' allocations of allowances. Without such a disincentive, firms would take the future cap-and-trade program into account when replacing or retiring capital equipment and would have a reason to choose less-carbon-intensive technologies (to lower their future allowance requirements).

Disincentives to reduce emissions prior to the cap-and-trade program could be avoided by altering the allowance-allocation method. Specifically, the base year could be changed to some past year (so a firm's current and future capital investments would not affect its allocations); output-based allocations could be used (although they have some disadvantages); or allowances could be auctioned. None of those allocation methods would penalize firms for cutting emissions before the start of the cap-and-trade program. Further, households and businesses would have an incentive to make early capital investments that reduced their energy use because such investments would lower their costs under the subsequent program.

Early-reduction crediting would transfer the cost burden under a cap-and-trade program from companies that engaged in early reductions to ones that did not (provided that the overall cap was unaffected by the amount of early reductions made). The credits that early-reducing firms earned would entitle them to free allowances during the trading program. Thus, the credits would decrease the number of allowances that those firms would need to buy (if the government auctioned off allowances) or would provide them with additional allowances that they could sell (if the government gave allowances away). Thus, firms that did not make early reductions would bear a larger share of the cost of meeting the limit on emissions.

The shift in the cost burden away from firms that received early-reduction credits would be particularly problematic when those credits were earned for reductions that the firms would have found it profitable to make anyway, regardless of regulatory incentives. Companies would receive a credit for such reductions, even though they would not decrease emissions relative to the level that would have occurred without an early-crediting program.

In addition, the administrative costs of implementing an early-crediting program would be relatively high, as would the private sector's reporting costs. Issuing credits would require the government to document emission reductions on a case-by-case basis. Establishing baselines for the many and diverse sources of carbon emissions under early crediting could be challenging. Given the difficulty of finding one method of setting baselines that would make sense for those various sources, the Pew Center on Global Climate Change (a foundation that funds nonprofit organizations) suggests that model agreements could be established for particular industries.

• Examples of those proposals include the Credit for Voluntary Early Actions Act (H.R. 2520) and the Credit for Early Actions Act (S. 547), which were introduced in the 106th Congress.
• Robert R. Nordhaus and Stephen C. Fotis, Early Action and Global Climate Change: An Analysis of Early Action Crediting Proposals (Philadelphia: Pew Center on Global Climate Change, October 1, 1998 ). That study contains a useful discussion of the difficulties associated with establishing baselines for early crediting. Another good discussion of that issue can be found in Larry B. Parker and John E. Blodgett, Global Climate Change Policy: Domestic Early Action Credits, CRS Report for Congress RL30155 (Congressional Research Service, July 23, 1999 ).

Distributional Effects. Existing companies in the electricity-generating sector would receive smaller windfall gains under output-based allocations than under grandfathering. With a GPS , the allowance allocation would lower firms' production costs (because it would be linked to their current production decisions) and would dampen the decreases in production and increases in electricity prices that would otherwise be caused by the cap on carbon emissions. As a result, consumers would tend to receive the value of the allowances in the form of lower electricity costs.(15) With grandfathering, in contrast, the allowance allocation would not affect production costs (because it would be independent of current production decisions) and would not dampen the production decreases or electricity price increases that the carbon cap would bring about. Thus, firms would tend not to pass the value of the allowances on to consumers; instead, they would retain that value, and it would be passed on to shareholders.

Would the Government Set a Ceiling on the Price of Allowances?

The government could establish a maximum price for allowances by agreeing to sell an unlimited quantity of them at a specified price. The decision about whether to do that highlights an important trade-off between two of the evaluation criteria in this study: carbon-target certainty and incremental-cost certainty. It could also have implications for the expected net benefits of the policy.

Previous cap-and-trade programs for pollutants, such as those for sulfur dioxide emissions, have set a limit on the level of the pollutant without setting a ceiling on the price of allowances. Without a price ceiling, the incremental cost of achieving the pollution limit could be far greater than expected. A trading program that had a price ceiling would leave the level of carbon reduction uncertain but would set an upper limit on the incremental cost that society would bear for cutting carbon emissions. The pollution target would be exceeded if the price ceiling was reached. Such a ceiling would limit carbon-reducing activities to ones that fell below the ceiling price, but it would not set a limit on the total cost to the U.S. economy.

Some research suggests that placing a ceiling on the price of carbon allowances could have advantages. Setting a carbon target at the optimal level–where the incremental cost of reducing carbon was equal to the incremental benefit–would be difficult because of the uncertainty surrounding costs and benefits. Setting a ceiling on the price of allowances instead would limit the cost that the U.S. economy would incur for incremental reductions in carbon emissions and would help avoid large losses (costs much greater than expected benefits) in the event that the cost of cutting emissions proved higher than anticipated or the carbon cap was too stringent. The price ceiling's advantages stem from the fact that both the costs and benefits of carbon reductions are uncertain and from the fact that the incremental costs can be expected to rise faster than the incremental benefits fall.

• See Center for Clean Air Policy , US Carbon Emissions Trading: Description of an Upstream Approach (Washington, D.C.: Center for Clean Air Policy, March 1998), p. 7. Additional entities would be involved if policymakers wished to prevent carbon-intensive intermediate goods–such as aluminum–from being placed at a competitive disadvantage (see Chapter 3).
• Ibid., p. 5.
• That statement assumes that policymakers would not set a ceiling on the price of allowances (discussed later in the chapter).
• For a discussion of leakage, see Center for Clean Air Policy, US Carbon Emissions Trading: Some Options That Include Downstream Sources (Washington, D.C.: Center for Clean Air Policy, April 1998), p. 14.
• Such shifts could bring about other undesirable consequences. For instance, if the cap applied only to large electricity generators, companies might purchase more electricity from smaller, less efficient generators.
• For example, the amount of carbon released per million British thermal units (MBTU) of coal is 1.8 times the amount released per MBTU of natural gas.
• See Congressional Budget Office, Who Gains and Who Pays Under Carbon-Allowance Trading? The Distributional Effects of Alternative Policy Designs (June 2000), pp. 17-19.
• One study concluded that the government could compensate coal, oil, and natural gas producers for their loss in equity values by using less than 10 percent of the total value of emission allowances; see A. Lans Bovenberg and Lawrence Goulder, Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does it Cost? Working Paper No. 7654 (Cambridge, Mass.: National Bureau of Economic Research, April 2000). Thus, the government would need to give away only a small fraction of the allowances to compensate fossil-fuel suppliers for their losses. Some allowances could also be given to intermediate producers, such as electricity generators, that rely heavily on fossil fuels.
• The allowances would provide each supplier with the opportunity to sell carbon-based fossil fuels, and higher fossil-fuel prices would lead to higher profits on each unit sold.
• Equal payments to residents could take the form of a fully refundable tax credit.
• Allowances could be grandfathered using many different criteria. One proposal described in Chapter 3 would base firms' allocations on their emission levels in a base year. In the current trading program for sulfur dioxide emissions, electricity generators' allowance allocations depend primarily on their heat input in a base year.
• See Department of Energy, Energy Information Administration, "Status of State Electric Industry Restructuring Activity as of May 2001" (available at www.eia.doe.gov/electricity/chg_str/regmap.html).
• See Dallas Burtraw and others, The Effect of Allowance Allocation on the Cost and Efficiency of Carbon Emission Trading (Washington, D.C.: Resources for the Future, April 2001).
• That difference would occur because the average carbon emissions from electricity produced from natural gas would be less than the generation performance standard. (If that were not the case, electricity generators would be unable to comply with a GPS for fossil-fuel-fired electricity.) In more general terms, a GPS system would tend to provide too little incentive for "output substitution" (decreasing the consumption of relatively carbon-intensive goods) and too much incentive for "input substitution" (lowering the carbon content of those goods). For a demonstration of that point in a theoretical framework, see Carolyn Fischer, Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards, draft (Washington, D.C.: Resources for the Future, May 5, 2000).
• Those electricity costs would be lower than under grandfathering but not lower than with no cap on carbon emissions.
• Martin L. Weitzman first showed that government policies that set a price on pollution–such as taxes or auctions with price ceilings –would lead to higher expected net benefits than policies that limit the level of pollution. (Quantity limits would perform better if incremental benefits were expected to decline more rapidly than incremental costs rose.) See Martin L. Weitzman, "Prices vs. Quantities," Review of Economic Studies, vol. 41, no. 4 (1974). William A. Pizer estimated the costs and benefits of reducing carbon emissions to the 1990 level in 2010 and concluded that costs would exceed benefits by $10 billion (in 1989 dollars). In contrast, he found that benefits would be approximately $2.5 billion higher than costs if a price ceiling was set at $7 per ton (in 1989 dollars). See William A. Pizer, Prices vs. Quantities Revisited: The Case of Climate Change, Discussion Paper No. 98-02 (Washington, D.C.: Resources for the Future, 1997).

Chapter Three

Evaluation of Four Cap-and-Trade Proposals

This chapter looks at four specific cap-and-trade proposals using the evaluation criteria that were described in Chapter 1. Since Chapter 2 discussed in detail the effects of various design characteristics on the evaluation of a cap-and-trade program, this chapter provides only summary evaluations of the four options (see Table 2). Three of the four are based on recent legislation or proposals by public interest groups. The other is not similar to any current proposal but was crafted by the Congressional Budget Office to highlight some of the trade-offs inherent in the actual proposals.

Table 2. How Various Cap-and-Trade Options Measure Up Against CBO's Evaluation Criteria
Criterion	Upstream Trading		Downstream Trading
	Option Ia	Option IIb	Option Ic	Option IId
Is Relatively Easy to Implement	Yes	Yes	No	Yes
Provides Certainty About Meeting Carbon Target	No	Yes	Yes for large emitters, No for the economy	Yes for the electricity sector,e No for the economy
Places an Upper Limit on Incremental Cost	Yes	No	No	No
Cost-Effectiveness
Creates incentives for least-cost emission reductions	Yes	Yes	Yesfor capped sources, No for other sources	No
Uses revenue to offset tax-interaction effect	No	Yes	No	No
Distributional Effects
Creates regressive price increases	Yes	Yes	Yes	Yes
Creates windfall gains for selected industries	No	No	Yes	Yes
Overall effect on households	Progressive	Regressive	Regressive	Regressive

SOURCE: Congressional Budget Office.

1. Similar to the "Sky Trust" proposal by Resources for the Future and Americans for Equitable Climate Solutions. Suppliers of fossil fuels would be required to hold emission allowances, which the government would sell by auction with the price per allowance capped. Auction revenue would be distributed evenly to all U.S. residents and to some companies hurt by the policy.
2. Similar to the previous option except that allowance prices would not be capped and auction revenue would be used to cut corporate income taxes.
3. Similar to a proposal by the Progressive Policy Institute. Large sources of carbon emissions would receive allowances free of charge on the basis of their current emissions. Their allocations would shrink by 1 percent per year.
4. Similar to three bills introduced in the 106th Congress (H.R. 2569, H.R. 2980, and S. 1369). Only carbon emissions from electricity generators would be capped. Generators would receive free allowances on the basis of their annual production multiplied by a generation performance standard.
5. Assuming that the government could adjust the generation performance standard each year to maintain the target level of emissions.

Upstream Trading Option I

This option is designed to resemble the "Sky Trust" proposal promoted by the groups Americans for Equitable Climate Solutions and Resources for the Future.(1) Under this proposal, domestic producers and importers of fossil fuels would be required to hold allowances equivalent to the amount of carbon dioxide that is eventually released from the fuels they sell. An emission target would be set at 1.346 billion metric tons of carbon, the amount emitted from fossil-fuel combustion in the United States in 1990. The government would sell allowances for that target through an auction and would set a price ceiling of $25 per allowance. If the demand for allowances was satisfied at a price of less than $25, the emission target would be met. If the allowance price rose to $25, however, the government would supply additional allowances at that price and the target would be exceeded.(2) The price ceiling would increase by 7 percent more than the rate of inflation each year.

The government would initially use 75 percent of its auction revenue to make equal annual payments to each legal resident of the United States. The remaining 25 percent would be used to compensate regions, companies, or consumers adversely affected by the policy. For example, some of those funds could be targeted toward coal-mining regions that would suffer declines in local employment because of the policy. The portion set aside for compensation would be phased out over 10 years, after which all of the revenue would be used for lump-sum payments to U.S. residents. If the price ceiling was met, the government would collect more than $33 billion in auction revenue in the initial year of the program and would provide each U.S. resident with a payment of about $100.

Ease of Implementation

Because it would place the allowance requirement upstream, this proposal could be implemented at relatively low cost. However, administrative costs could increase if special provisions were adopted to prevent placing U.S. products that are highly energy-intensive (such as aluminum) at a competitive disadvantage. For example, the government could require importers of those products to pay import duties (reflecting the higher fuel costs faced by domestic producers) and could provide exporters with subsidies that would offset their higher fuel costs.

Carbon-Target Certainty and Incremental-Cost Certainty

This option would not necessarily restrict U.S. emissions to 1.346 billion metric tons. The target would be met only if firms and households could do so at a cost of $25 or less per ton of reduction. However, the price ceiling would place an upper limit on that incremental cost, at least initially. Over time, the program would become increasingly restrictive–and more likely to meet the carbon target–as the price ceiling rose.

Cost-Effectiveness

The program would be cost-effective in the sense that it would encourage lowest-cost emission reductions throughout the economy through the price increases that it induced. Those price increases would provide an incentive for the development of new technologies as well as for the use of existing technologies.

Distributional Effects

Under this option, auction revenue would be used to offset the distributional effects of the price increases on households as well as the costs to producers. The lump-sum payments to U.S. residents would be progressive in that they would represent a larger percentage increase in income for lower-income households than for higher-income households. The ultimate effect on households would depend on the relative magnitude of the regressivity of the price increases and the progressivity of the payments. Overall, however, the policy would most likely be progressive.

Upstream Trading Option II

This proposal is similar to Upstream Trading Option I but with two key differences that are intended to illustrate the trade-offs between competing policy goals. First, no ceiling would be set on the price of allowances. Second, auction revenue would be used to reduce marginal tax rates on corporate income.

Ease of Implementation

Implementing this policy would be similar to carrying out Upstream Trading Option I.  Carbon-Target Certainty and Incremental-Cost Certainty.

In contrast to the previous option, this proposal would ensure that the limit of 1.346 billion metric tons of carbon emissions was met in the first year of the program as well as in later years. The cost to the economy of meeting that limit, however, would be uncertain.

Cost-Effectiveness

Like Upstream Trading Option I, this proposal would encourage the lowest-cost cuts in carbon emissions. Unlike that option, however, it would use the auction revenue to lower corporate income tax rates, thus reducing the tax-interaction effect and giving households more incentive to save and invest. The resulting increase in economic activity could significantly decrease the cost to the economy of achieving the carbon limit.

Distributional Effects

The price increases created by this policy would be regressive because lower-income households spend relatively more on energy. Higher-income households would benefit the most from the cut in corporate income taxes because they bear more of the burden of those taxes.(5) Therefore, the overall effect on households would be regressive. Corporations as a whole would benefit from the tax cut, but some energy-intensive producers might still be worse off since they would bear a greater share of the cost than other businesses would.

Downstream Trading Option I

This option for downstream trading is similar to one being promoted by the Progressive Policy Institute (PPI).(6) The program would initially cap carbon emissions from large sources at the current level and decrease that cap by 1 percent per year. Under this downstream design, large emitters of carbon dioxide (rather than fossil-fuel suppliers) would be required to hold allowances. Those large emitters would include:

• Electric utilities,
• Manufacturing facilities,
• Government facilities,
• Commercial transportation fleets (trucks, airplanes, buses, and automobiles), and
• Large organizations (those with more than 10,000 workers) whose employees commute to work.

The government would distribute allowances to those large emitters for free. In the first year of the program, recipients would get enough allowances to cover their own estimated level of emissions. Their allowance allocations would be decreased by 1 percent per year thereafter.

Large emitters would be required to "pass through" allowances to customers who demonstrated net reductions in energy use.(8) For example, utilities would pass through allowances to companies that installed energy-efficient lighting. That pass-through requirement is designed to broaden participation in the allowance market to include companies, property owners, and others who adopt more-energy-efficient products and processes. In addition, third parties would be able to organize small entities to obtain allowances through the pass-through process. For instance, organizations that retrofitted homes to make them more energy efficient could obtain pass-through allowances from utilities (under an agreement with the homeowners). That bundling of allowances would be permitted in order to encourage small entities to participate.

Advocates of a comprehensive downstream trading program argue that placing the allowance requirement on the individual businesses and households that consume fossil fuel either directly or indirectly (in the form of electricity) would reduce their energy use more effectively than would the price increases resulting from an upstream approach. However, as described below, implementing such a comprehensive program would be very expensive, and the pass-through and third-party provisions would create uneven incentives that would lessen the program's cost-effectiveness.

Ease of Implementation

The administrative costs of carrying out this policy would be steep because of the large number of sources involved and the difficulty of assessing their carbon emissions. The reporting costs of the private sector would be high as well.

Implementing the cap on existing large sources of carbon emissions would entail regulating tens–if not hundreds–of thousands of companies. The program would rely on self-reported emissions data from those sources. The government's ability to verify those data (through spot-check audits) would vary widely among the sources. Moreover, sources would have an incentive to overreport their initial carbon emissions to avoid having to reduce emissions as their allowance allocations decreased over time. Reconciling the total number of carbon emissions reported from all large sources with total emissions as calculated from economywide fossil-fuel use would be difficult.

The task of administering this policy would be complicated even more by the pass-through provision and third-party involvement. Small emitters that wished to receive pass-through allowances would be required to establish baselines and document their emission reductions. The government would be responsible for seeing that large sources passed through allowances to small emitters when justified. Further, regulators would need to ensure that allowances were not counted twice. For example, if a third party installed energy-efficient lighting in small commercial establishments and obtained pass-through allowances from a utility, regulators would need to ensure that those commercial establishments did not also apply for the pass-through allowances. Implementing the pass-through and third-party provisions would greatly increase the number of entities involved, the government's administrative costs, and the private sector's reporting costs.

Carbon-Target Certainty

Assuming that this program could be enforced, it would cap carbon emissions from existing large sources. However, it would not provide an economy-wide limit on carbon emissions, for two reasons. First, small sources would not be capped, and second, new sources could result in additional emissions. The PPI proposal states that the government would "set aside" 5 percent of the current year's emission allowances to auction to new market entrants. But it is unclear how that provision would work if existing companies received allocations on the basis of the full amount of their current emissions, as proposed. If the allocations for existing sources were not decreased by the amount of additional emissions from new sources, the total amount of carbon emissions from large sources would rise.

Incremental-Cost Certainty

This option would not place an upper limit on the incremental cost of meeting the cap on existing large sources of carbon emissions.

Cost-Effectiveness

If the program could be implemented effectively, it would, over time, create incentives to decrease carbon emissions throughout much of the economy. The allowance requirement would encourage utilities, large industrial direct emitters, commercial transportation fleets, public agencies, and large organizations to reduce their carbon consumption in order to decrease the number of allowances they were required to hold (so they could sell excess allowances). Those large sources would cut their emissions if the cost of doing so was less than the price at which they could sell allowances. In addition, the program would lead to price increases that would encourage energy conservation farther downstream.

Although this option would cover many sources of emissions, it would not minimize the cost of reducing U.S. carbon emissions, for two reasons. First, it would not encourage reductions from some sources. For example, it would not provide many households with an incentive to drive less–only those people who work for a large organization that encouraged public transportation or carpooling as a result of the policy.(9) Second, even among covered sources, the program would create uneven incentives by overcompensating some sources for emission reductions. For instance, firms and households that used less electricity could benefit both from lower electricity costs and from selling the allowances that their utility would be required to pass through to them. Thus, the pass-through provision would overencourage carbon reductions from those sources relative to large sources, who would simply receive the value of the allowances (if they were not required to pass that value through) or receive no benefit (if they did pass the allowance value through).

Distributional Effects

The allowance requirement would increase energy prices, disproportionately affecting lower-income households. In addition, the allowance-allocation method would tend to benefit the higher-income households that were shareholders in the firms that would receive the allowances.

The pass-through provision could also put large emitters at a distributional disadvantage relative to pass-through recipients. For example, households that installed energy-efficient water heaters would benefit both from saving money through reduced fuel use and from obtaining the value of the allowances associated with that lower fuel use. Utilities, in contrast, would not capture the value of the allowances (because they had to pass them through to homeowners), plus they would sell less electricity.

Downstream Trading Option II: Electricity-Sector Cap

This option, which would limit carbon emissions from the electricity-generating sector, resembles proposals in three bills that were introduced in the 106th Congress (H.R. 2569, H.R. 2980, and S. 1369). Under this option the government would set a cap on emissions from fossil-fuel-fired electricity-generating units above a given size.(11) Regulators would determine a generation performance standard ( GPS ) for each year by dividing the cap by the amount of electricity that they expected covered units to produce that year. Each covered unit would receive an annual allocation of allowances equal to the amount of electricity it generated in that year multiplied by the GPS.

Generating units would be required to hold an allowance for each ton of carbon they emitted. If their emissions were less than the number of allowances they received, they could sell the excess allowances or save them for a later year. Alternatively, if their emissions were greater than the number of allowances they were allocated, they would have to buy allowances from other units or use ones they had saved from previous years.

Ease of Implementation

Two factors would tend to make implementing a cap-and-trade program for the electricity-generating sector relatively easy. First, the program could build on the existing regulatory structure for trading emissions of sulfur dioxide and nitrogen oxides. Second, generators that are regulated under the acid-rain provisions of the Clean Air Act already measure their carbon emissions. (Like the upstream trading options discussed earlier, implementation would be more complicated if policymakers wanted to avoid placing electricity-intensive goods at a competitive disadvantage.)

Implementation costs, however, would be higher under this proposal's method of allocation than under grandfathering (basing allocations on past levels of production or emissions). The number of allowances that generators would receive in a given year–and thus their carbon emissions–would depend on their production in that year and on the government-defined GPS . As 2 discussed, setting the GPS so as to meet a specific carbon target would require successfully forecasting electricity production for the year and annually updating the GPS.

Carbon-Target Certainty

Under this proposal, the target for carbon emissions from the electricity sector would be met only if government regulators had correctly predicted electricity production for the coming year and adjusted the annual generation performance standard accordingly.(12) Even so, this program would not limit emissions from outside the electricity-generating sector–which make up more than 60 percent of all carbon emissions.

Incremental-Cost Certainty

This option would not place a limit on the per-increment cost that the U.S. economy would incur to reduce carbon emissions.

Cost-Effectiveness

Assuming competitive pricing of electricity, the cost of emission reductions would be higher under a cap-and-trade program with a GPS than under a program that met the same carbon target but in which allowances were grandfathered or sold at auction. Specifically, a GPS would result in too little reduction in electricity consumption–and too much reliance on natural gas for electricity generation–relative to the least-cost solution. In contrast, grandfathering allowances or selling them in an auction would give businesses and households an incentive to reduce carbon emissions from the electricity sector in the least costly way.

In a partially deregulated electricity market, in which some states have competitive pricing and some do not, grandfathering may not be more cost-effective than a GPS system, according to a recent study (13) The study concludes that auctioning allowances would be the most cost-effective allocation method in such a market because electricity prices would tend to increase more with an auction than with either type of free allocation. Those higher prices would lessen the inefficiencies in pricing that occur in regulated electricity markets. Electricity is typically priced inefficiently low in such markets because regulators set prices on the basis of the average cost of production rather than the marginal cost of production (the cost of producing one more unit). An auction would tend to bring prices closer to the marginal cost of production–the real cost that society bears–than either type of free allocation would. (With competitive pricing, auctioning and grandfathering would be expected to result in similar price increases and would be equally cost-effective: both would cause the cost of allowances to be reflected in the price that consumers pay for electricity.)

A cap-and-trade program that was limited to the electricity-generating sector would not produce emission reductions at the lowest possible cost to the economy (even if it minimized the cost of reductions from electricity generators) because it would not encourage reductions–or provide incentives for innovation–in other sectors. A GPS for fossil-fuel-fired electricity-generating units could be coupled with regulatory measures for other sectors. In that case, however, the cost-effectiveness of using different regulatory approaches for different sectors of the economy should be compared with the cost-effectiveness of using a comprehensive upstream cap-and-trade approach.

Distributional Effects

Under this proposal, electricity prices would increase (although by less than under grandfathering or an auction), and natural gas prices would rise as well. Both of those price increases would tend to be regressive.

Existing firms in the electricity-generating sector would receive smaller windfall gains with a GPS than with grandfathering. Consumers would receive a significant share of the allowances' value in the form of smaller price increases for electricity (relative to grandfathering). To the extent that producers captured some of the allowances' value, shareholders would benefit.

Conclusions

A cap-and-trade program that regulated upstream suppliers of fossil fuels would offer several advantages over one that focused on downstream users. It would be relatively easy to implement and would create a uniform incentive throughout the economy for cutting carbon emissions–thus bringing about emission reductions in a cost-effective way.

Policymakers' decision about whether to set a ceiling on the price of allowances in an upstream trading program would depend on the relative importance they attached to two alternative goals: certainty about meeting the emission target or predictability about the cost of reducing an increment of carbon emissions. If policymakers crafted a program with a fixed target (such as Upstream Trading Option II), they would not know the program's cost until the target was met. Alternatively, they could create a program with a price ceiling (such as Upstream Trading Option I), but then the program would not necessarily meet its target. Given the uncertainty of the costs and benefits of carbon reductions–and the expectation that as more reductions were made, incremental costs would rise faster than incremental benefits would fall–a price ceiling would be advantageous.

Selling the allowances through an auction, as opposed to giving them away, would mean that the auction revenue could be used either to lower the overall cost of the program or to make it more equitable. Giving the permits away could also achieve equity goals if policymakers distributed the allowances to firms and households in proportion to their share of the cost of the cap on carbon emissions.

Policymakers could reduce the total cost of the program by using auction revenue to cut marginal tax rates on corporate income (as in Upstream Trading Option II), thereby offsetting the tax-interaction effect (the exacerbation of existing taxes that discourage work or saving). However, such a strategy would tend to benefit high-income households more than others, adding to the regressivity of the price increases caused by the carbon reductions. As a result, the cap-and-trade program would be more regressive than it would be otherwise.

Using revenue to make equal payments to U.S. residents (as in Upstream Trading Option I), by contrast, would offset the regressivity of the price increases but significantly boost the overall cost of the policy. Likewise, giving allowances or auction revenue to companies could compensate them for their share of the cost of the carbon restriction but would raise the overall cost.

With any cap-and-trade program, policymakers would be unable to fully offset the distributional effects even if they devoted all of the allowances' value to doing so. Further, such a strategy would leave no allowance value to offset the tax-interaction effect. Deciding what to do with the allowances' value, therefore, would entail making trade-offs among competing goals. Policymakers might choose to use a combination of strategies. For example, they could design a program in which some allowances were given to companies (as compensation for higher costs) and some were sold. They could return auction revenue to the economy through a combination of tax cuts (to offset the tax-interaction effect) and direct payments to households (or other spending programs designed to counter the regressive nature of the price increases).

A downstream trading system could, in theory, cover multiple sectors of the economy and capture a large share of carbon emissions (see Downstream Trading Option I). Advocates of such a design argue that businesses and households would be more likely to reduce their use of fossil fuels and energy-intensive goods in response to allowance requirements than in response to the incentives created by changes in fuel prices. However, because of the number of entities involved and the degree of oversight required, the cost of implementing a comprehensive downstream trading program could well be prohibitive.

A downstream program that was limited to the electricity-generating sector (such as Downstream Trading Option II) would be easier to implement than a more comprehensive design. But such a program would cover only about 40 percent of the nation's carbon emissions. The same total cut in emissions might be achieved at a lower cost if some of the reductions were made outside the electricity-generating sector.

• See Americans for Equitable Climate Solutions, "Sky Trust Initiative: Economy-Wide Proposal to Reduce U.S. Carbon Emissions" (available at www.aecs-inc.org/indexn.html); and Raymond Kopp and others, "A Proposal for Credible Early Action in U.S. Climate Policy," Resources for the Future (available at www.weathervane.rff.org/features/feature060.html).
• A similar proposal has been made by Warwick J. McKibbin and Peter J. Wilcoxen; see Warwick McKibbin and Peter J. Wilcoxen, Designing a Realistic Climate Change Policy That Includes Developing Countries (Washington, D.C.: Brookings Institution, October 20, 1999), and Warwick J. McKibbin, An Early Action Climate Change Policy for All Countries, draft (Washington, D.C.: Brookings Institution, July 28, 2000). Their proposal would establish "emission permits," which would allow holders to produce a unit of carbon in a particular year, and "emission endowments," which would entitle holders to an emission permit each year forever. The government would set a price ceiling for emission permits at $10 for 10 years and then reevaluate that ceiling. Endowment holders would buy and sell endowments on the basis of their expectation about future permit prices. Assuming that a futures market for allowances would develop under the Sky Trust proposal, the two proposals would be similar in terms of their implications for economic efficiency. Both would create downstream price signals to encourage emission reductions from all sources. Further, both would give fuel suppliers an opportunity to reduce uncertainty by contracting for rights to emit carbon in the future. The main difference between the proposals would be their distributional effects. McKibbin and Wilcoxen's would give "a significant portion" of the endowments to fossil-fuel suppliers and would issue the remainder to U.S. citizens. Thus, shareholders of fossil-fuel suppliers and U.S. households would capture some of the value of the emission endowments directly. The remaining distributional effects would depend on how the government used the revenue that it received from selling emission permits at the price ceiling. Under the Sky Trust proposal, in contrast, no allowances would be given away. The distribution of the allowances' value would be determined solely by the government's decision about how to use the auction revenue.
• The particular types of adjustments that would be possible would depend on existing international agreements.
• CBO also examined a carbon-limiting policy in which the price per allowance was assumed to be $100 and the government used auction revenue to provide equal payments to U.S. households. In that scenario, the progressive effect of equal payments outweighed the regressive effect of the policy-induced price increases, and the overall effect of the policy was progressive. See Congressional Budget Office, Who Gains and Who Pays Under Carbon-Allowance Trading? The Distributional Effects of Alternative Policy Designs (June 2000).
• The corporate income tax initially falls (has an incidence) on corporate capital, but when capital used by corporations flows into the economy, part–or all–of the burden could be shifted onto capital in general or onto labor. Based on an extensive review of the literature on corporate tax incidence, this study assumes that a cut in corporate taxes is equivalent to an increase in the rate of return on capital in general. See Congressional Budget Office, The Incidence of the Corporate Tax, CBO Paper (March 1996).
• See Jon Naimon and Debra Knopman, Reframing the Climate Change Debate: The United States Should Build a Domestic Market Now for Greenhouse Gas Emissions Reductions, Policy Report (Washington, D.C.: Progressive Policy Institute, November 1, 1999 ); and Debra Knopman and Jonathan Naimon, How a Domestic Greenhouse Gas Emissions Trading Market Could Work in Practice: A Supplement to the November 1999 Policy Report "Reframing the Climate Change Debate," Backgrounder (Washington, D.C.: Progressive Policy Institute, March 1, 2000 ).
• In an effort to limit methane emissions, the PPI proposal would also cover coal-mining companies and industrial agricultural facilities. This discussion addresses only the policies to decrease carbon emissions.
• The PPI proposal is not explicit about how this pass-through provision would work.
• An exception would occur if a third party could successfully bundle carbon savings from small direct emitters. The transaction costs of doing that, however, could be sizable.
• To a lesser extent, households could receive allowances through the pass-through and third-party provisions. In that case, the distributional effects of the policy would depend on the income levels of the households that received the pass-through allowances.
• All three bills would have established a limit of 1.914 billion tons of carbon dioxide (or 522 million tons of carbon) for the electricity-generating sector and defined covered units as those with a generating capacity of 15 megawatts or greater.
• Alternatively, allowing the target to be exceeded could be an advantage if greater-than-expected growth in electricity generation led to higher incremental costs of emission reductions.
• See Dallas Burtraw and others, The Effect of Allowance Allocation on the Cost and Efficiency of Carbon Emission Trading (Washington, D.C.: Resources for the Future, April 2001).
• For example, a study by the H. John Heinz III Center for Science, Economics and the Environment evaluates a program that caps carbon emissions for electricity generators and large industrial combustors while setting performance standards for vehicles, appliances, buildings, and small electric motors; see H. John Heinz III Center for Science, Economics and the Environment, Designs for Domestic Carbon Emissions Trading (Washington, D.C.: Heinz Center, September 1998), pp. 41-52. That study assumes a tradable corporate average standard for carbon emissions from the automotive industry. Automakers that beat the standard could sell their excess allowances to other automakers or to electricity generators and large industrial combustors. A potential problem with performance standards is that they could raise the price of vehicles and thus give drivers an incentive to use older, more polluting, vehicles longer. CBO has not evaluated the pros and cons of such an approach.

The above information provided by the U.S. Department of Energy and Congressional Budget Office with our thanks.

Solar Electric Power Systems (PV)

Solar electric power systems transform sunlight into electricity. Sunlight is an abundant resource. Every minute the sun bathers the Earth in as much energy as the world consumes in an entire year.

Solar cells employ special materials called semiconductors that create electricity when exposed to light. Solar electric systems are quiet and easy to use, and they require no fuel other than sunlight. Because they contain no moving parts, they are durable, reliable, and easy to maintain.

How It Works

Solar cells, also known as photovoltaic (PV) cells, do the work of making electricity. Several types of solar electric technology are under development, but four—crystalline silicon (a form of refined beach sand), thin films, concentrators, and thermophotovoltaics—are illustrative of the range of technologies. Solar cells are connected to a variety of other components to make a solar electric power system.

Crystalline Silicon

Crystalline silicon solar cells are used in more than half of all solar electric devices. Like most semiconductor devices, they include a positive layer (on the bottom) and a negative layer (on the top) that create an electrical field inside the cell. When a photon of light strikes a semiconductor, it releases electrons (see animation). The free electrons flow through the solar cell's bottom layer to a connecting wire as direct current (DC) electricity.

Some solar cells are made from polycrystalline silicon, which consists of several small silicon crystals. Polycrystalline silicon solar cells are cheaper to produce but somewhat less efficient than single-crystal silicon.

A simple silicon solar cell can power a watch or calculator. However, it produces only a tiny amount of electricity. Connected together, solar cells form modules that can generate substantial amounts of power. Modules are the building blocks of solar electric systems, which can produce enough power for a house, a rural medical clinic, or an entire village. Large arrays of solar electric modules can power satellites or provide electricity for utilities.

Solar Electric Power System Components

In addition to modules, several components are needed to complete a solar electric power system.

Many systems include batteries, battery chargers, a backup generator, and a controller so that people in solar-powered homes and buildings can turn on the lights at night or run televisions or appliances on cloudy days. Grid-connected systems don't require batteries or backup generators because they use the grid for backup power. Some remote system applications, such as those used to pump water, do not require a backup power source.

Solar electric power systems can incorporate inverters or power control units to transform the DC electricity produced by the solar cells into alternating current (AC) to run AC appliances or sell to a utility grid. Complete systems usually include safety disconnects, fuses, and a grounding circuit as well.

Thin Films

Solar electric thin films are lighter, more resilient, and easier to manufacture than crystalline silicon modules. The best-developed thin-film technology uses amorphous silicon, in which the atoms are not arranged in any particular order as they would be in a crystal. An amorphous silicon film only one micron thick can absorb 90% of the usable solar energy falling on it. Other thin-film materials include cadmium telluride and copper indium diselenide. Substantial cost savings are possible with this technology because thin films require relatively little semiconductor materials.

Thin films are produced as large, complete modules, not as individual cells that must be mounted in frames and wired together. They are manufactured by applying extremely thin layers of semiconductor material to a low-cost backing such as glass or plastic. Electrical contacts, antireflective coatings, and protective layers are also applied directly to the backing material. Thin films conform to the shape of the backing, a feature that allows them to be used in such innovative products as flexible solar electric roofing shingles.

Concentrators

Concentrators use optical lenses (similar to plastic magnifying glasses) or mirrors to concentrate the sunlight that falls on a solar cell. With a concentrator to magnify the light intensity, the solar cell produces more electricity. Today, most solar cells in concentrators are made from crystalline silicon. However, materials such as gallium arsenide and gallium indium phosphide are more efficient than silicon in solar electric concentrators and will likely see more use in the future. These materials are now used in communications satellites and other space applications.

Concentrators produce more electricity using less of the expensive semiconductor material than other solar electric systems. A basic concentrator unit consists of a lens to focus the light, a solar cell assembly, a housing element, a secondary concentrator to reflect off-center light rays onto the cell, a mechanism to dissipate excess heat, and various contacts and adhesives. The basic unit can be combined into modules of varying sizes and shapes. Concentrators only work with direct sunlight and operate most effectively in sunny, dry climates. They must be used with tracking systems to keep them pointed toward the sun.

Thermophotovoltaics

Thermophotovoltaic (TPV) devices convert heat into electricity in much the same way that other PV devices convert light into electricity. The difference is that TPV technology uses semiconductors "tuned" to the longer-wavelength, invisible infrared radiation emitted by warm objects. This technology is cleaner, quieter, and simpler than conventional power generation using steam turbines and generators.

TPV converters are relatively maintenance-free because they contain no moving parts. In addition to using solar energy, they can convert heat from any high-temperature heat source, including combustion of a fuel such as natural gas or propane, into electricity. TPV converters produce virtually no carbon monoxide and few emissions. They may be used in the future in gas furnaces that generate their own electricity for self-ignition (during power outages) and in portable generators and battery chargers.

Advantages

Solar electric systems offer many advantages. Standalone systems can eliminate the need to build expensive new power lines to remote locations. For rural and remote applications, solar electricity can cost less than any other means of producing electricity. Solar electric systems can also connect to existing power lines to boost electricity output during times of high demand such as on hot, sunny days when air conditioners are on.

Solar electric systems are flexible. Solar electric modules can stand on the ground or be mounted on rooftops. They can also be built into glass skylights and walls. They can be made to look like roof shingles and can even come equipped with devices to turn their DC output into the same AC utilities deliver to wall sockets. These advances mean individual homeowners and businesses can relieve pressure on local utilities struggling to meet the increasing demand for electricity.

More than 30 states offer grid-connected solar electric system owners the chance to save money on their energy bills by feeding any excess power their solar electric system produces into the utility grid—an arrangement called net metering.

Solar power systems require minimal maintenance. They run quietly and efficiently without polluting. They are easy to combine with other types of electric generators such as wind, hydro, or natural gas turbines. They can charge batteries to make solar electricity continuously available.

For utilities, large-scale solar electric power plants can help meet demand for new power generation, especially in distributed applications. A solar electric power plant is created from multiple arrays that are interconnected electronically. Solar electric plants are easier to site and are quicker to build than conventional power plants. They are also easy to expand incrementally—by adding more modules—as power demand increases.

Solar electric power systems are good for the environment. When solar electric technologies displace fossil fuels for pumping water, lighting homes, or running appliances, they reduce the greenhouse gases and pollutants emitted into the atmosphere. The use of solar electric systems is particularly important in developing nations because it can help avert the expected increases in emissions of greenhouse gases caused by the growing demand for electricity in those countries.

Solar electric technologies also benefit the U.S. economy by creating jobs in U.S. companies. Exporting solar electric technologies to developing nations expands U.S. markets while protecting the global environment.

Disadvantages

Although solar electric systems make financial sense in remote areas that lack access to power lines, they are usually more expensive than fossil fuels for grid-connected applications.

This disadvantage is significant for utilities considering large-scale solar electric power plants. Although solar electricity costs considerably more than electricity generated by conventional plants, regulatory agencies often require utilities to supply electricity for the lowest cash cost.

Utilities view solar electric power plants differently than they view conventional power plants. Solar electric modules produce electricity intermittently—only when the sun shines. Their output varies with the weather and disappears altogether at night. Integrating solar electricity into a utility system requires creative planning.

Applications

Solar electricity has powered satellites since the dawn of the space program. It has run remote communications outposts high in the mountains and turned on the lights, kept medicines cold, and pumped water in rural areas for more than 30 years. Small solar cells are used to power wristwatches, calculators, and other electronic gadgets. More recently, solar electric systems have been used to provide supplemental power to homes and commercial buildings in cities.

Solar electric technology has important roles to play in both the developing and developed worlds. From the farmer irrigating his crops in rural Mexico to an innovative lighting system for an Olympic sports arena, solar electric solutions abound.

Electric utilities harness solar electricity for distributed applications—near substations or at the end of overloaded power lines, for example, to avoid or defer costly line upgrades. They use solar electricity during hot, sunny periods when the demand for air conditioning stretches conventional power generation to its limit. The Sacramento Municipal Utility District, for example, uses large solar electric arrays as part of its power generation mix. Utilities also rely on solar electricity to power remote, standalone monitoring systems.

Consumers and builders are integrating solar electric modules into their homes and offices. Innovative solar electric technologies can replace conventional roofing and facade materials in new buildings. Solar electric roofing shingles, for example, are being used in some new residences. In grid-connected applications, solar electricity supplies some of a consumer's energy needs; the local utility provides the rest.

Standalone solar electric systems power a variety of applications far from the reaches of the power grid. These applications include remote communications systems such as television and radio transmitters and receivers, telephone systems, and microwave repeaters. Standalone solar electric power is also used to prevent corrosion of metal pipes, tanks, bridges, and buildings.

Many remote residences worldwide use solar electricity as their source of power. For instance, more than 100,000 vacation homes in Scandinavia rely solely on solar electric technology to run lights and appliances.

Villages around the world are building solar electric systems to bring electricity to their homes and local industries, often for the first time. To make the maximum use of available resources, village power is typically produced by a hybrid power system that combines solar electricity with diesel backup generators and sometimes another renewable energy technology such wind power. Villages also use standalone solar electric systems for pumping water—an application shared by rural farmers and ranchers in the United States.

Our Solar Heating and Cooling System – Uses the "free" Power of the Sun to Heat and Cool your Commercial Business or Home for Free!

Cooling and heating your building (home, office, school, hospital, etc.) costs you up to 60%, or more, every month you receive your electric bill. You can eliminate the heating and cooling portion of your electric bill forever, and cool and heat your home with the sun's power with our Solar Heating and Cooling system!

Our Solar Heating and Cooling system is the cleanest, greenest, and lowest cost method to cool and warm your home or commercial office or other buildings. Our Solar Heating and Cooling system will eliminate your energy costs for heating and cooling your home, office, school, or any other commercial facility for *free: Requires the purchase of our Solar Heating and Cooling system. Minimum size is 10 tons. You must be located in a qualified geographic location, which means our system must be located to receive direct sunlight. For qualified customers, we will install the system with little to no money down and you pay for the system with the savings our system provides!

Solar Absorption Cooling. Solar heat can be used to displace electricity used for cooling. Absorption chillers use a heat source, such as natural gas or hot water from solar collectors, to evaporate the already-pressurized refrigerant from an absorbent/refrigerant mixture. Condensation of vapors provides the same cooling effect as that provided by mechanical cooling systems. Although absorption chillers require electricity for pumping the refrigerant, the amount is very small compared to that consumed by a compressor in a conventional electric air conditioner or refrigerator. Solar Absorption Cooling systems are typically sized to carry the full air conditioning load during sunny periods.

What is an Absorption Chiller and How Does it Work?

Absorption chillers use heat instead of mechanical energy to provide cooling. A thermal compressor consists of an absorber, a generator, a pump, and a throttling device, and replaces the mechanical vapor compressor.

In the chiller, refrigerant vapor from the evaporator is absorbed by a solution mixture in the absorber. This solution is then pumped to the generator. There the refrigerant re-vaporizes using a waste steam heat source. The refrigerant-depleted solution then returns to the absorber via a throttling device. The two most common refrigerant/ absorbent mixtures used in absorption chillers are water/lithium bromide and ammonia/water.

Compared with mechanical chillers, absorption chillers have a low coefficient of performance (COP = chiller load/heat input). However, absorption chillers can substantially reduce operating costs because they are powered by low-grade waste heat. Vapor compression chillers, by contrast, must be motor- or engine-driven.

Low-pressure, steam-driven absorption chillers are available in capacities ranging from 100 to 1,500 tons. Absorption chillers come in two commercially available designs: single-effect and double-effect. Single-effect machines provide a thermal COP of 0.7 and require about 18 pounds of 15-pound-per-square-inch-gauge (psig) steam per ton-hour of cooling. Double-effect machines are about 40% more efficient, but require a higher grade of thermal input, using about 10 pounds of 100- to 150-psig steam per ton-hour.

A single-effect absorption machine means all condensing heat cools and condenses in the condenser. From there it is released to the cooling water. A double-effect machine adopts a higher heat efficiency of condensation and divides the generator into a high-temperature and a low-temperature generator.

Is It Right for You?

Absorption cooling may be worth considering if your site requires cooling, and if at least one of the following applies:

• You have a combined heat and power CHP) unit and cannot use all of the available heat, or if you are considering a new CHP plant
• Waste heat is available
• A low-cost source of fuels is available
• Your boiler efficiency is low due to a poor load factor
• Your site has an electrical load limit that will be expensive to upgrade
• Your site needs more cooling, but has an electrical load limitation that is expensive to overcome, and you have an adequate supply of heat.

In short, absorption cooling may fit when a source of free or low-cost heat is available, or if objections exist to using conventional refrigeration. Essentially, the low-cost heat source displaces higher-cost electricity in a conventional chiller.

In Practice

In a plant where low-pressure steam is currently being vented to the atmosphere, a mechanical chiller with a COP of 4.0 is used 4,000 hours a year to produce an average 300 tons of refrigeration. The plant's cost of electricity is $0.05 a kilowatt-hour.

An absorption unit requiring 5,400 lbs/hr of 15-psig steam could replace the mechanical chiller, providing annual electrical cost savings of:

• Annual Savings = 300 tons x (12,000 Btu/ton / 4.0) x 4,000 hrs/yr x $0.05/kWh x kWh/3,413 Btu = $52,740

Actions You Can Take

Determine the cost-effectiveness of displacing a portion of your cooling load with a waste steam absorption chiller by taking the following steps:

• Conduct a plant survey to identify sources and availability of waste steam
• Determine cooling load requirements and the cost of meeting those requirements with existing mechanical chillers or new installations
• Obtain installed cost quotes for a waste steam absorption chiller
• Conduct a life cycle cost analysis to determine if the waste steam absorption chiller meets your company's cost-effectiveness criteria.

Absorption Chiller Refrigeration Cycle

The basic cooling cycle is the same for the absorption and electric chillers. Both systems use a low-temperature liquid refrigerant that absorbs heat from the water to be cooled and converts to a vapor phase (in the evaporator section). The refrigerant vapors are then compressed to a higher pressure (by a compressor or a generator), converted back into a liquid by rejecting heat to the external surroundings (in the condenser section), and then expanded to a low- pressure mixture of liquid and vapor (in the expander section) that goes back to the evaporator section and the cycle is repeated.

The basic difference between the electric chillers and absorption chillers is that an electric chiller uses an electric motor for operating a compressor used for raising the pressure of refrigerant vapors and an absorption chiller uses heat for compressing refrigerant vapors to a high-pressure. The rejected heat from the power-generation equipment (e.g. turbines, microturbines, and engines) may be used with an absorption chiller to provide the cooling in a CHP system.

The basic absorption cycle employs two fluids, the absorbate or refrigerant, and the absorbent. The most commonly fluids are water as the refrigerant and lithium bromide as the absorbent. These fluids are separated and recombined in the absorption cycle. In the absorption cycle the low-pressure refrigerant vapor is absorbed into the absorbent releasing a large amount of heat. The liquid refrigerant/absorbent solution is pumped to a high-operating pressure generator using significantly less electricity than that for compressing the refrigerant for an electric chiller. Heat is added at the high-pressure generator from a gas burner, steam, hot water or hot gases. The added heat causes the refrigerant to desorb from the absorbent and vaporize. The vapors flow to a condenser, where heat is rejected and condense to a high-pressure liquid. The liquid is then throttled though an expansion valve to the lower pressure in the evaporator where it evaporates by absorbing heat and provides useful cooling. The remaining liquid absorbent, in the generator passes through a valve, where its pressure is reduced, and then is recombined with the low-pressure refrigerant vapors returning from the evaporator so the cycle can be repeated.

Absorption chillers are used to generate cold water (44°F) that is circulated to air handlers in the distribution system for air conditioning.

"Indirect-fired" absorption chillers use steam, hot water or hot gases steam from a boiler, turbine or engine generator, or fuel cell as their primary power input. Theses chillers can be well suited for integration into a CHP system for buildings by utilizing the rejected heat from the electric generation process, thereby providing high operating efficiencies through use of otherwise wasted energy.

"Direct-fired" systems contain natural gas burners; rejected heat from these chillers can be used to regenerate desiccant dehumidifiers or provide hot water.

Commercially absorption chillers can be single-effect or multiple-effect. The above schematic refers to a single-effect absorption chiller. Multiple-effect absorption chillers are more efficient and discussed below.

Multiple-Effect Absorption Chillers

In a single-effect absorption chiller, the heat released during the chemical process of absorbing refrigerant vapor into the liquid stream, rich in absorbent, is rejected to the environment. In a multiple-effect absorption chiller, some of this energy is used as the driving force to generate more refrigerant vapor. The more vapor generated per unit of heat or fuel input, the greater the cooling capacity and the higher the overall operating efficiency.

A double-effect chiller uses two generators paired with a single condenser, absorber, and evaporator. It requires a higher temperature heat input to operate and therefore they are limited in the type of electrical generation equipment they can be paired with when used in a CHP System.

Triple-effect chillers can achieve even higher efficiencies than the double-effect chillers. These chillers require still higher elevated operating temperatures that can limit choices in materials and refrigerant/absorbent pairs. Triple-effect chillers are under development by manufacturers working in cooperation with the U.S. Department of Energy.

About Solar Heating and Cooling

It is possible to use solar thermal energy or solar electricity to operate or power an HVAC or heating and cooling system. The following is a brief description of "active" solar cooling and refrigeration technologies. Active solar energy systems use a mechanical or electrical device to transfer solar energy absorbed in a solar collector to another component in the "system." It is possible to also cool a building or structure by using the natural processes of solar heat transfer (conduction, convection, and radiation). This is often referred to as "passive solar cooling," and is primarily an architectural technique. This brief focuses on active solar cooling systems. The American Solar Energy Society (ASES, see Source List below) is one source of information on passive solar cooling techniques.

Absorption Cooling and Refrigeration

Absorption cooling is the first and oldest form of air conditioning and refrigeration. An absorption air conditioner or refrigerator does not use an electric compressor to mechanically pressurize the refrigerant. Instead, the absorption device uses a heat source, such as natural gas or a large solar collector, to evaporate the already-pressurized refrigerant from an absorbent/refrigerant mixture. This takes place in a device called the vapor generator. Although absorption coolers require electricity for pumping the refrigerant, the amount is small compared to that consumed by a compressor in a conventional electric air conditioner or refrigerator. When used with solar thermal energy systems, absorption coolers must be adapted to operate at the normal working temperatures for solar collectors: 180° to 250°F (82° to 121°C). It is also possible to produce ice with a solar powered absorption device, which can be used for cooling or refrigeration.

Biomass Power and Energy

What is an Anaerobic Digester?

An Anaerobic Digester is a device for optimizing the anaerobic digestion of biomass and/or animal manure, and possibly to recover biogas also referred to as BioMethane for energy production. Digester types include batch, complete mix, continuous flow (horizontal or plug-flow, multiple-tank, and vertical tank), and covered lagoon.

What is Anaerobic Digestion?

Anaerobic digestion is a biological process that produces a gas principally composed of methane (CH4) and carbon dioxide (CO2) otherwise known as biogas. These gases are produced from organic wastes such as livestock manure, food processing waste, etc.

Anaerobic processes could either occur naturally or in a controlled environment such as a biogas plant. Organic waste such as livestock manure and various types of bacteria are put in an airtight container called digester so the process could occur. Depending on the waste feedstock and the system design, biogas is typically 55 to 75 percent pure methane. State-of-the-art systems report producing biogas that is more than 95 percent pure methane.

The U.S. EPA AgSTAR Program Background

The U.S. EPA AgSTAR is an outreach program designed to reduce methane emissions from livestock waste management operations by promoting the use of biogas recovery systems. A biogas recovery system is an anaerobic digester with biogas capture and combustion to produce electricity, heat or hot water. Biogas recovery systems are effective at confined livestock facilities that handle manure as liquids and slurries, typically swine and dairy farms. Anaerobic digester technologies provide enhanced environmental and financial performance when compared to traditional waste management systems such as manure storages and lagoons. Anaerobic digesters are particularly effective in reducing methane emissions but also provide other air and water pollution control opportunities. AgSTAR provides an array of information and tools designed to assist producers in the evaluation and implementation these systems, including:

• Conducting farm digester extension events and conferences
• Providing “How-To” project development tools and industry listings
• Conducting performance characterizations for digesters and conventional waste management systems
• Operating a toll free hotline
• Providing farm recognition for voluntary environmental initiatives
• Collaborating with federal and state renewable energy, agricultural, and environmental programs

Methane Emissions from Animal Waste Management

Methane emissions occur whenever animal waste is managed in anaerobic conditions. Liquid manure management systems, such as ponds, anaerobic lagoons, and holding tanks create oxygen free environments that promote methane production. Manure deposited on fields and pastures, or otherwise handled in a dry form, produces insignificant amounts of methane. Currently, livestock waste contributes about 8 percent of human-related methane emissions in the U.S. Given the trend toward larger farms, liquid manure management is expected to increase. For more information on international emissions, projections, and mitigation costs, see International Analyses.

Methane (Biogas) from Anaerobic Digesters

Methane is a gas that contains molecules of methane with one atom of carbon and four atoms of hydrogen (CH4 ). It is the major component of the "natural" gas used in many homes for cooking and heating. It is odorless, colorless, and yields about 1,000 British Thermal Units (Btu) [252 kilocalories (kcal)] of heat energy per cubic foot (0.028 cubic meters) when burned. Natural gas is a fossil fuel that was created eons ago by the anaerobic decomposition of organic materials. It is often found in association with oil and coal.

The same types of anaerobic bacteria that produced natural gas also produce methane today. Anaerobic bacteria are some of the oldest forms of life on earth. They evolved before the photosynthesis of green plants released large quantities of oxygen into the atmosphere. Anaerobic bacteria break down or "digest" organic material in the absence of oxygen and produce "biogas" as a waste product. (Aerobic decomposition, or composting, requires large amounts of oxygen and produces heat.) Anaerobic decomposition occurs naturally in swamps, water-logged soils and rice fields, deep bodies of water, and in the digestive systems of termites and large animals. Anaerobic processes can be managed in a "digester" (an airtight tank) or a covered lagoon (a pond used to store manure) for waste treatment. The primary benefits of anaerobic digestion are nutrient recycling, waste treatment, and odor control. Except in very large systems, biogas production is a highly useful but secondary benefit.

Biogas produced in anaerobic digesters consists of methane (50%-80%), carbon dioxide (20%-50%), and trace levels of other gases such as hydrogen, carbon monoxide, nitrogen, oxygen, and hydrogen sulfide. The relative percentage of these gases in biogas depends on the feed material and management of the process. When burned, a cubic foot (0.028 cubic meters) of biogas yields about 10 Btu (2.52 kcal) of heat energy per percentage of methane composition. For example, biogas composed of 65% methane yields 650 Btu per cubic foot (5,857 kcal/cubic meter).

Digester Designs

Anaerobic digesters are made out of concrete, steel, brick, or plastic. They are shaped like silos, troughs, basins or ponds, and may be placed underground or on the surface. All designs incorporate the same basic components: a pre-mixing area or tank, a digester vessel(s), a system for using the biogas, and a system for distributing or spreading the effluent (the remaining digested material).

There are two basic types of digesters: batch and continuous. Batch-type digesters are the simplest to build. Their operation consists of loading the digester with organic materials and allowing it to digest. The retention time depends on temperature and other factors. Once the digestion is complete, the effluent is removed and the process is repeated.

In a continuous digester, organic material is constantly or regularly fed into the digester. The material moves through the digester either mechanically or by the force of the new feed pushing out digested material. Unlike batch-type digesters, continuous digesters produce biogas without the interruption of loading material and unloading effluent. They may be better suited for large-scale operations. There are three types of continuous digesters: vertical tank systems, horizontal tank or plug-flow systems, and multiple tank systems. Proper design, operation, and maintenance of continuous digesters produce a steady and predictable supply of usable biogas.

Many livestock operations store the manure they produce in waste lagoons, or ponds. A growing number of these operations are placing floating covers on their lagoons to capture the biogas. They use it to run an engine/generator to produce electricity.

The Digestion Process

Anaerobic decomposition is a complex process. It occurs in three basic stages as the result of the activity of a variety of microorganisms. Initially, a group of microorganisms converts organic material to a form that a second group of organisms utilizes to form organic acids. Methane-producing (methanogenic) anaerobic bacteria utilize these acids and complete the decomposition process.

A variety of factors affect the rate of digestion and biogas production. The most important is temperature. Anaerobic bacteria communities can endure temperatures ranging from below freezing to above 135° Fahrenheit (F) (57.2° Centigrade [C]), but they thrive best at temperatures of about 98°F (36.7°C) (mesophilic) and 130°F (54.4°C) (thermophilic). Bacteria activity, and thus biogas production, falls off significantly between about 103° and 125°F (39.4° and 51.7°C) and gradually from 95° to 32°F (35° to 0°C).

In the thermophilic range, decomposition and biogas production occur more rapidly than in the mesophilic range. However, the process is highly sensitive to disturbances such as changes in feed materials or temperature. While all anaerobic digesters reduce the viability of weed seeds and disease-producing (pathogenic) organisms, the higher temperatures of thermophilic digestion result in more complete destruction. Although digesters operated in the mesophilic range must be larger (to accommodate a longer period of decomposition within the tank [residence time]), the process is less sensitive to upset or change in operating regimen.

To optimize the digestion process, the digester must be kept at a consistent temperature, as rapid changes will upset bacterial activity. In most areas of the United States, digestion vessels require some level of insulation and/or heating. Some installations circulate the coolant from their biogas-powered engines in or around the digester to keep it warm, while others burn part of the biogas to heat the digester. In a properly designed system, heating generally results in an increase in biogas production during colder periods. The trade-offs in maintaining optimum digester temperatures to maximize gas production while minimizing expenses are somewhat complex. Studies on digesters in the north-central areas of the country indicate that maximum net biogas production can occur in digesters maintained at temperatures as low as 72°F (22.2°C).

Other factors affect the rate and amount of biogas output. These include pH, water/solids ratio, carbon/nitrogen ratio, mixing of the digesting material, the particle size of the material being digested, and retention time. Pre-sizing and mixing of the feed material for a uniform consistency allows the bacteria to work more quickly. The pH is self-regulating in most cases. Bicarbonate of soda can be added to maintain a consistent pH, for example when too much "green" or material high in nitrogen content is added. It may be necessary to add water to the feed material if it is too dry, or if the nitrogen content is very high. A carbon/nitrogen ratio of 20/1 to 30/1 is best. Occasional mixing or agitation of the digesting material can aid the digestion process. Antibiotics in livestock feed have been known to kill the anaerobic bacteria in digesters. Complete digestion, and retention times, depends on all of the above factors.

Producing and Using Biogas

As long as proper conditions are present, anaerobic bacteria will continuously produce biogas. Minor fluctuations may occur that reflect the loading routine. Biogas can be used for heating, cooking, and to operate an internal combustion engine for mechanical and electric power. For engine applications, it may be advisable to scrub out hydrogen sulfide (a highly corrosive and toxic gas). Very large-scale systems/producers may be able to sell the gas to natural gas companies, but this may require scrubbing out the carbon dioxide.

Using the Effluent

The material drawn from the digester is called sludge, or effluent. It is rich in nutrients (ammonia, phosphorus, potassium, and more than a dozen trace elements) and is an excellent soil conditioner. It can also be used as a livestock feed additive when dried. Any toxic compounds (pesticides, etc.) that are in the digester feedstock material may become concentrated in the effluent. Therefore, it is important to test the effluent before using it on a large scale.

Economics

Anaerobic digester system costs vary widely. Systems can be put together using off-the-shelf materials. There are also a few companies that build system components. Sophisticated systems have been designed by professionals whose major focus is research, not low cost. Factors to consider when building a digester are cost, size, the local climate, and the availability and type of organic feedstock material.

In the United States, the availability of inexpensive fossil fuels has limited the use of digesters solely for biogas production. However, the waste treatment and odor reduction benefits of controlled anaerobic digestion are receiving increasing interest, especially for large-scale livestock operations such as dairies, feedlots, and slaughterhouses. Where costs are high for sewage, agricultural, or animal waste disposal, and the effluent has economic value, anaerobic digestion and biogas production can reduce overall operating costs. Biogas production for generating cost effective electricity requires manure from more than 150 large animals.

Below-ground, concrete anaerobic digesters have proven to be especially useful to agricultural communities in parts of the world such as China, where fossil fuels and electricity are expensive or unavailable. The primary purpose of these anaerobic digesters is waste (sewage) treatment and fertilizer production. Biogas production is secondary.

Accomplishments

The AgSTAR Program has been very successful in encouraging the development and adoption of anaerobic digestion technology. Since the establishment of the program in 1994, the number of operational digester systems has doubled. This has produced significant environmental and energy benefits, including methane emission reductions of approximately 124,000 metric tons of carbon equivalent and annual energy generation of about 30 million kWh. The graph below shows the historical use of biogas recovery technology for animal waste management.

The development of anaerobic digesters for livestock manure treatment and energy production has accelerated at a very fast pace over the past few years. Factors influencing this market demand include: increased technical reliability of anaerobic digesters through the deployment of successful operating systems over the past five years; growing concern of farm owners about environmental quality; an increasing number of state and federal programs designed to cost share in the development of these systems; and the emergence of new state energy policies (such as net metering legislation) designed to expand growth in reliable renewable energy and green power markets.

In the past 2 years alone, the number of operational digester systems has increased by 30%. For more detailed information on anaerobic digester use in the U.S., go to the Guide to Operational Systems or see the AgSTAR 2003 Digest

The process of anaerobic digestion consists of three steps

The first step is the decomposition (hydrolysis) of plant or animal matter. This step breaks down the organic material to usable-sized molecules such as sugar. The second step is the conversion of decomposed matter to organic acids. And finally, the acids are converted to methane gas.

Process temperature affects the rate of digestion and should be maintained in the mesophillic range (95 to 105 degrees Fahrenheit) with an optimum of 100 degrees F. It is possible to operate in the thermophillic range (135 to 145 degrees F), but the digestion process is subject to upset if not closely monitored.

Many anaerobic digestion technologies are commercially available and have been demonstrated for use with agricultural wastes and for treating municipal and industrial wastewater.

At Royal Farms No. 1 in Tulare, California, hog manure is slurried and sent to a Hypalon-covered lagoon for biogas generation. The collected biogas fuels a 70 kilowatt (kW) engine-generator and a 100 kW engine-generator. The electricity generated on the farm is able to meet monthly electric and heat energy demand.

Given the success of this project, three other swine farms (Sharp Ranch, Fresno and Prison Farm) have also installed floating covers on lagoons. The Knudsen and Sons project in Chico, California, treated wastewater which contained organic matter from fruit crushing and wash down in a covered and lined lagoon. The biogas produce is burned in a boiler. And at Langerwerf Dairy in Durham, California, cow manure is scraped and fed into a plug flow digester. The biogas produced is used to fire an 85 kW gas engine. The engine operates at 35 kW capacity level and drives a generator to produce electricity. Electricity and heat generated is able to offest all dairy energy demand. The system has been in operation since 1982.

Most anaerobic digestion technologies are commercially available. Where unprocessed wastes cause odor and water pollution such as in large dairies, anaerobic digestion reduces the odor and liquid waste disposal problems and produces a biogas fuel that can be used for process heating and/or electricity generation.

Technology assessment

This section describes the anaerobic digestion (AD) process, outlines guidelines for assessing the feasibility of AD and biogas usage at a swine facility and provides summary information on AD system performance and reliability.

Anaerobic Digestion Technology Description

AD promotes the bacterial decomposition of the volatile solids (VS) in animal wastes to biogas, thereby reducing lagoon loading rates and odor. The primary component of an AD system is the anaerobic digester, a waste vessel containing bacteria that digest the organic matter in waste streams under controlled conditions to produce biogas. As an effluent, AD yields nearly all of the liquid that is fed to the digester. This remaining fluid consists of mostly water and is allowed to evaporate from a secondary lagoon, land-applied for irrigation and fertilizer value or recycled to flush manure from the swine building to the digester.

The benefits of AD include:

• Odor reduction;
• Reduction in the biological oxygen demand of treated effluent by up to 90 percent, reducing the risk for water contamination;
• Improved nutrient application control, because up to 70 percent of the nitrogen in the waste is converted to ammonia, the primary nitrogen constituent of fertilizer;
• Reduced pathogens, viruses, protozoa and other disease-causing organisms in lagoon water, resulting in improved herd health and possible reduced water requirements; and
• Potential to generate electricity and process heat.

AD takes place in three steps: hydrolysis, acid formation, and methane generation. During the first step, hydrolysis, bacterial enzymes break down proteins, fats and sugars in the waste to simple sugars. During acid formation, bacteria convert the sugars to acetic acid, carbon dioxide and hydrogen. Then the bacteria convert the acetic acid to methane and carbon dioxide, and combine carbon dioxide and hydrogen to form methane and water.

Digester technologies that can be used to collect biogas from swine facilities include:

• Covered anaerobic lagoons,
• Complete mix digesters and
• Sequencing batch reactors.

Although a sequencing batch reactor has been used for AD at one swine facility in the United States , this technology is considered to be experimental, and thus is not included in this report. This report focuses on technologies that have verifiable performance characteristics, namely, covered anaerobic lagoons and complete mix digesters.

Appendix B provides contact information that can help producers find AD system designers/installers, odor control technologies, generators, heating and cooling equipment, and other information to help manage air and water quality at hog facilities.

Covered lagoon digesters are the simplest AD system. These systems typically consist of an anaerobic combined storage and treatment lagoon, an anaerobic lagoon cover, an evaporative pond for the digester effluent, and a gas treatment and/or energy conversion system. Figure 1 shows a typical schematic for a floating covered anaerobic lagoon.

Figure 1 . Covered anaerobic lagoon digester

Covered lagoon digesters typically have a hydraulic retention time (HRT) of 40 to 60 days. The HRT is the amount of time a given volume of waste remains in the treatment lagoon. A collection pipe leading from the digester carries the biogas to either a gas treatment system such as a combustion flare, or to an engine/generator or boiler that uses the biogas to produce electricity and heat. Following treatment, the digester effluent is often transferred to an evaporative pond or to a storage lagoon prior to land application.

Climate affects the feasibility of using covered lagoon digesters to generate electricity. Engine/generator systems typically do not produce sufficient waste heat to maintain temperatures high enough in covered lagoon digesters in the winter to sustain consistently high biogas production rates. Using propane or natural gas to provide additional heat for the lagoon contents is typically not an economically viable option. Without that additional heat, most covered lagoon digesters produce less biogas in colder temperatures, and little or no gas below 39 FACE= "Symbol">° F. As a result, covered lagoon digesters are most appropriate for use in warm climates if the biogas is to be used for energy or heating purposes.

Complete mix digester systems consist of a mix tank, a complete mix digester and a secondary storage or evaporative pond. The mix tank is either an aboveground tank or concrete in-ground tank that is fed regularly from underfloor waste storage below the animal feedlot. Waste is stirred in the mix tank to prevent solids from settling in the waste prior to being fed to the digester. The complete mix digester is essentially a constant-volume aboveground tank or in-ground covered lagoon that is fed daily from the mix tank. Complete mix digesters with in-ground lagoons often employ covers similar to those used in covered lagoon digesters. In the digester, a mix pump circulates waste material slowly around the heater to maintain a uniform temperature. Hot water from an engine/generator cogeneration water jacket or boiler is used to heat the digester. A cylindrical aboveground tank, such as that shown in Figure 2, optimizes biogas production, but is more capital intensive than in-ground tanks. The only operating AD system in Colorado that recovers methane for energy use is a complete mix digester, located at Colorado Pork LLC near Lamar, Colorado.

Figure 2 . Complete mix digester schematic

Complete mix digesters have an HRT of 15 to 20 days, which means that complete mix digesters can reduce the overall lagoon volume required for waste storage and treatment. This makes complete mix digesters comparable to covered lagoon digesters in cost, despite the increased complexity of stirring, mixing and plumbing components. In addition, biogas production rates, and therefore heat and electricity production, are greater and more consistent than for covered lagoons. This can help reduce system payback periods compared to covered lagoon systems. Like covered lagoon systems, digester effluent from complete mix digesters is frequently stored in evaporative ponds or storage lagoons.

System Requirements

This section provides guidelines for conducting a preliminary assessment of the feasibility of using AD at a swine facility. Although AD system requirements will vary depending on the application and system design, there are some rule-of-thumb measures that should be noted when assessing the feasibility of AD at a given location. For AD to potentially be technically feasible and cost-effective, a swine facility should:

• Simultaneously house at least 2,000 animals with a total live animal weight of at least 110,000 pounds,
• Have no more than 20 percent variation in animal population throughout the year,
• Collect waste at one central location such as an underfloor pit,
• Collect waste daily or every other day, or can convert to an equivalent collection system,
• Have manure free of large amounts of bedding or other foreign materials, and
• Have some manure storage capability to maintain a steady digester feedstock supply

If the above characteristics are present, the facility is a possible candidate for AD. Many pre-existing waste storage and treatment lagoons are too large to practically or cost-effectively employ covers over their entire area. Partial covers may be an option to recover methane from these older systems, as an alternative to installing a completely new storage and treatment lagoon system.

If energy recovery is to be employed, methane production and gas quality should be considered and compared to energy requirements at the facility. Daily biogas production at installed farm-based anaerobic digesters in the United States varies from 24,000 to 75,000 cubic feet, or an energy equivalent of 13 to 42 million British thermal units (Btu) (assuming 55 percent methane content for biogas). Covered lagoon digesters and complete mix digesters differ in their methane production characteristics, and energy conversion systems that rely on methane from anaerobic digesters should be chosen according to the end-use objective for the system. Complete mix digesters can produce heat and electricity at a constant rate throughout the year because heat recovery can be used to heat the digesters in the winter. Covered lagoon digesters can consistently produce biogas only in months when the temperature exceeds 39 degrees Fahrenheit.

Facilities that are located south of the line of climate limitation in Figure 3 are usually warm enough for cost-effective energy recovery from covered lagoon digesters. In most cases, facilities north of the climate line in Figure 3 are too cold for cost-effective energy recovery from covered lagoon digesters. Complete mix digesters can be used in cold or warm climates. If odor control is the only objective, either covered lagoon or complete mix digesters may be used, but odor control will be less effective in the winter for covered lagoon digesters south of the line of climate limitation in Figure 3. In general, complete mix digesters are the most appropriate choice for use in Colorado.

Figure 3 . Line of climate limitation for biogas energy recovery

Table 2 shows which digesters are appropriate for the waste collection strategies at covered swine facilities. Complete mix digesters can operate with a waste total solids (TS) percentage between 3 and 10 percent, while covered lagoon digesters can use waste with a TS percentage less than 2 percent.

Table 2 . Matching a digester to existing waste collection practices

Collection system	Percent TS required	Digester type	Suitable climate
Scrape	3-8	Complete mix	Warm or cold
Pit storage	3-8	Complete mix	Warm or cold
Flush	<2	Covered lagoon	Warm
Pit recharge	<3	Covered lagoon	Warm
Gravity drainage
Pull plug	<2	Covered lagoon	Warm
Managed pull-plug	3-6	Complete mix	Warm or cold

Source – Adapted from: EPA. (July 1997). AgStar Handbook: A Manual for Developing Biogas Systems at Commercial Farms in the United States . EPA 430-B-97-015. pp. 4-15.

Appendix C describes each of the various waste collection technologies listed in Table 2.

Biogas Utilization Options

This section discusses some of the biogas utilization options that are available for use with AD. Electricity generation with waste heat recovery (cogeneration) and direct combustion and use in equipment that normally uses propane or natural gas are the two primary options for biogas utilization. Electricity generated using biogas can be generated for on-farm use or for sale to the electric power grid if an economically attractive power purchase agreement can be negotiated through the local utility or rural electric cooperative. Direct combustion allows the gas to be used in existing equipment that normally uses propane or natural gas such as boilers or forced air furnaces with minor equipment modifications. Combustion is usually a seasonal use for biogas, as most boiler and furnace applications are only required during the winter. The EPA FarmWare manual describes some characteristics of engine/generator and direct combustion systems that can be used with biogas. The following subsections draw from the FarmWare manual to provide some basic information about the use of these systems at covered swine facilities and other farm applications.

Electricity Generation

Commercial electricity generation systems that use biogas typically consist of an internal combustion (IC) engine, a generator, a control system and an optional heat recovery system.

IC engines designed to burn propane or natural gas are easily converted to burn biogas by adjusting carburation and ignition systems. Such engines are available in nearly any capacity, but the most successful varieties are industrial engines that are designed to work with wellhead natural gas. A biogas-fueled engine will normally convert 18 to 25 percent of the biogas Btu value to electricity.

Two types of generators are used on farms: induction generators and synchronous generators. Induction generators operate in parallel with the utility and cannot operate as a stand-alone power source. Induction generators derive their phase, frequency and voltage from the utility. Synchronous generators operate as an isolated system or in parallel to the utility, and require more sophisticated intertie systems to match output to utility phase, frequency and voltage.

Control systems are required to protect the engine and the utility. Control packages are available that can shut the engine off due to mechanical problems, utility power outage or utility voltage and frequency fluctuations, or in the event that excess power is generated that the utility will not accept. Generators that operate in parallel with the utility system, such as induction generators, require an intertie system with safety relays to shut off the engine and disconnect from the utility in the event of a problem. Intertie negotiations with a utility for induction generators are typically much easier than for a synchronous generator, due to the level of control the utility has over the characteristics of power entering the grid from an induction generator. The primary advantage of a synchronous generator is its ability to act as a stand-alone power source. However, if operated as an isolated system, a synchronous generator must be oversized to meet the highest electrical demand, while operating less efficiently at average or partial loads. Due to the system size and more complicated control requirements, a synchronous generator operating as an isolated system is typically more expensive than an induction generator.

Biogas engines reject approximately 75 to 82 percent of the energy input as waste heat. This waste heat can be used to heat the digester and/or provide water or space heat to the facility. Commercial heat exchangers can recover waste heat from the engine water cooling system and the engine exhaust, recovering up to 7,000 Btu/hour for each kW of generator load. Waste heat recovery increases the energy efficiency of the system to 40 to 50 percent.

Emerging new digester and distributed electricity generation technologies could create new opportunities for on-farm electricity generation using biogas. Microgy Cogeneration Systems (Microgy), based in Colorado, has a new digester technology coupled with a cogeneration technology that Microgy claims increases the useful energy yield from digesters and can improve the economics of coupling digesters with energy recovery. Microgy will be demonstrating the technology at a Wisconsin dairy farm, using a 1 MW generator to turn the methane from decomposing cow manure into power. This demonstration is partially funded in part by the Wisconsin Focus on Energy program. The plant will be built, owned, and run by Microgy who will sell the power to Wisconsin Energy. A key element to the Microgy business concept is that the farm owner will not need to make the capital investment in the digester plant, but will still reap the odor control and other waste treatment benefits of the digester. Microgy will be selling the power generated back to the utility. In Colorado, the CDPHE negotiated a settlement with National Hog Farms in August, 2000 whereby the CDPHE would reduce the size of fines for violations of waste quality and odor quality standards in exchange for evaluating the use of Microgy technology at their facility.

Ongoing research and development is focusing on the use of microturbines and fuel cells for converting biogas to electricity. Microturbines are high-speed, small-scale (typically less than 100 kW) gas-driven turbine systems that produce electricity efficiently, have low emissions and require little maintenance. Reflective Energies in Viejo, California in partnership with Capstone Microturbine Corporation is working on developing the Flex-Microturbine, a power generation technology that can use biogas from animal waste, landfill gas and biomass gasification as its fuel source. Fuel cells are an emerging technology that operate, in principle, like a battery, but do not run out of charge. Instead, fuel cells equipped with a fuel reformer can use any type of hydrocarbon fuel, and run continuously as long as fuel is available. Fuel cells can convert fuel to electricity at efficiencies close to 40 percent, compared to 30 percent for the most efficient engine. In addition, fuel cell emissions include heat, some of which can be recovered for other applications, water, and carbon dioxide.

The Department of Energy’s WRBEP funded a project in fiscal year 2000 in San Luis Obispo , California that will demonstrate electricity generation from methane using a prototype microturbine at a 350-cow farm. The project will be using a 25 kW Capstone microturbine prototype to generate electricity at the California Polytechnic State University’s demonstration farm.

Direct Combustion

Direct combustion of biogas on-site in a boiler or forced air furnace can provide seasonal heat to nurseries, farrowing rooms and other facilities at a swine facility. A cast iron natural gas boiler can be used for most farm boiler applications. The air-fuel mixture will require adjustment and burner jets will need to be enlarged for use with low-Btu gas. Cast iron boilers are available in many sizes, from 45,000 Btu/hour and up. Untreated biogas may be used, but all metal surfaces of the boiler housing should be painted to prevent corrosion. Flame tube boilers with heavy gauge flame tubes may be used if the exhaust temperature is maintained above 300 FACE= "Symbol">° F to prevent condensation. Forced air furnaces can be used in place of direct fire room heaters, but biogas must be treated to remove hydrogen sulfide because of potential corrosion problems in metal ductwork.

System Performance and Benefits of AD

There are several measures of waste management system performance that are relevant for producers considering the use of AD. These include:

• Odor control,
• Water quality protection
• Energy production.

AD is the only waste management strategy available that provides the option to recover methane for energy production.

The APCD has determined that the minimum standard for compliance with odor control regulations for waste vessels and impoundments is an 80 percent reduction in all odor-causing gases, including hydrogen sulfide, ammonia and volatile organic compounds from waste vessels or impoundments. Table 3 compares the effectiveness of some of the odor control methods being implemented at covered swine facilities in Colorado. Lagoon covers and AD are among the most effective means of reducing odors from waste storage and treatment systems. However, several strategies may be combined to increase the effectiveness of individual odor control strategies at a facility. As an example, feed additives can be used in conjunction with biofilters, surface aeration or solids separation to increase overall odor control from waste storage and treatment lagoons. In addition, any lagoon odor control technology should be accompanied by an overall odor management program using best management practices as described in Appendix D.

Table 3 . Odor control effectiveness of management strategies for anaerobic lagoons

Odor control technology	Percent (%) odorous gas emissions reduction
Feed processing/additives
Grinding feed	5-12
Wet-feeding hogs (3:1 water to feed)	23-31
Reducing sulfur-containing amino acids	49-63
Adding fiber (soybeans, hulls to diet)	Up to 68
Biofilters	50
Solids separation	50-60
Soil injection of waste upon land application	50-80 (land application odors only)
Surface aeration	Up to 85
Aerobic cap	Up to 90
Lagoon additives	Up to 90
Lagoon covers	80-90
Anaerobic digestion	80-90
Composting	Up to 100 for well-managed systems

Source: Iversen, Kirk and Jessica Davis. (February 1999). Innovations in odor management technology. Colorado State University . Agricultural and Resource Policy Report. APR-99-02. Fort Collins , CO.

In addition to regulating odors from waste lagoons, the new odor control regulations have requirements for waste that is applied to agricultural land. The new regulations for waste treatment at covered swine facilities require that waste applied to agricultural land and not injected be treated to remove at least 65 percent of the TS and over 90 percent of the total volatile fatty acids or 60 percent of total VS. If not treated, waste applied to agricultural land must be injected or knifed into the soil upon application. Land application is not permitted between November 1 and February 28. Of the waste management strategies in Table 3, four will help reduce the TS and VS content prior to land application.

• Wet-feeding,
• Solids separation,
• AD and
• Composting.

Wet feeding can reduce the TS and VS by a value equal to the dilution rate of the feed (i.e., 3:1 ratio of water to feed). However, introducing this type of feeding system increases water requirements and may increase required anaerobic lagoon volumes. Solids separation can reduce TS by 30 to 45 percent. Solids separation methods include screen separators, mechanical presses, settling tanks, settling basins, vacuum filters and many other means. An efficient AD installation will reduce the TS percentage by up to 76 percent and VS by up to 90 percent. Of the above technologies, AD with covered anaerobic lagoons is the only one the APCD considers a proven technology because of their odor control effectiveness. Therefore, unlike the other options above, covered anaerobic digesters do not have to meet the additional testing requirements for technologies that the APCD considers experimental.

Composting may or may not meet the TS requirement because it often involves the addition of a bulking agent to increase TS to optimize waste decomposition. However, composting can be effective at controlling odors and reducing pathogens. The APCD is presently reviewing the compliance status of one facility that uses composting. Composting has applications besides manure treatment for livestock facilities. The Colorado Governor’s Office of Energy Management and Conservation is currently supporting the demonstration of composting technology for hog mortality disposal at a hog farm in Colorado.

In an AD system, most of the organic nitrogen (N) from the digester is converted to ammonium, an easily manageable fertilizer with slow release properties when compared to mineralized fertilizers. This is an advantage over anaerobic lagoons alone. Organic N in the form of protein and urea is mineralized in soil solution after land application. This mineralized N can pose a groundwater problem when land-applied because mineralized N can be converted to nitrates and leach into groundwater in the spring and fall when plant uptake of N is low.

A disadvantage of reducing the nutrient content of lagoon effluent via AD is the loss of the value of nutrients. Reducing the use of lagoon effluent as fertilizer increases the need for industrial fertilizers, the manufacture and transportation of which uses significant quantities of petroleum. However, this loss is balanced by the benefits of increased control farmers have over the nutrient content of effluent used for irrigation purposes.

System Reliability

System reliability is a key concern for swine producers that are considering AD with energy recovery as an objective. AD systems first began to be used extensively after World War II in Europe when energy supplies were reduced. Today there are over 600 digesters in Europe alone. Farm-based anaerobic digesters are the most common application of AD technology worldwide. In the U.S. , livestock producers have less experience working with anaerobic digesters, with a total of approximately 160 digesters either planned or installed in 1998. Of these, 36 employ technology that is suitable for use at swine facilities.

A recent survey of anaerobic digesters yielded mixed results for system reliability (Table 4). At farms across the U.S. , the percentage of installed digesters that are not operating is nearly 46 percent. However, one encouraging note is that the reliability of digesters constructed since 1984 is much greater than for those constructed between 1972 and 1984.

Table 4 . Status of farm-based digesters at swine facilities in the United States

Status	Covered lagoon digesters	Complete mix digesters	Total
Operating	7	6	13
Not operating	1	10	11
Facility closed	1	5	6
Planned/Under construction	-	4	4
Planned but not built	1	1	2
Total	10	26	36

Source: Lusk, Phil (September 1998). Methane Recovery from Animal Manures: the Current Opportunities Casebook. NREL/SR-25145. NREL. Golden, CO. pp. 1-2.

The most common reasons that systems are not operating include poor design and installation and poor equipment specification. The lessons learned that should be kept in mind for future systems include the need to select qualified contractors and the fact that amortizing the cost of appropriate equipment is less costly than a system failure. The improved reliability of newer systems and increased understanding of the biological systems that operate in an anaerobic digester suggest that the reliability of systems will continue to improve as long as the lessons of past system failures are heeded.

What is BioMethane?

BioMethane is a renewable energy/fuel, with properties similar to natural gas, produced from "biomass." Unlike natural gas, BioMethane is a renewable energy.

The cost of producing BioMethane, after installation of the BioMass Gasification equipment used to produce BioMethane (the process of making BioMethane is called "BioMethanation") is called is essentially free.

Again, unlike the price of natural gas, which has been around $6.00/mmbtu for the past year.

More About Biomass Gasification and BioMethanation Technology

The production and disposal of large quantities of organic and biodegradable waste without adequate or proper treatment results in widespread environmental pollution. Some waste streams can be treated by conventional methods like aeration. Compared to the aerobic method, the use of anaerobic digesters in processing these waste streams provides greater economic and environmental benefits and advantages

As previously stated, Biomethanation is the process of conversion of organic matter in the waste (liquid or solid) to BioMethane (sometimes referred to as "BioGas) and manure by microbial action in the absence of air, known as "anaerobic digestion."

Conventional digesters such as sludge digesters and anaerobic CSTR (Continuous Stirred Tank Reactors) have been used for many decades in sewage treatment plants for stabilizing the activated sludge and sewage solids.

Interest in BioMethanation as an economic, environmental and energy-saving waste treatment continues to gain greater interest world-wide and has led to the development of a range of anaerobic reactor designs. These high-rate, high-efficiency anaerobic digesters are also referred to as "retained biomass reactors" since they are based on the concept of retaining viable biomass by sludge immobilization.

Biomass Gasification and the Production of BioMethane

Biomass is a renewable energy resource which includes a wide variety of organic resources. A few of these include wood, agricultural residue/waste, and animal manure.

Biomass Gasification is the process in which BioMethane is produced in the BioMass Gasification process. The BioMethane is then used like any other fuel, such as natural gas, which is not a renewable fuel.

Historically, biomass use has been characterized by low btu and low efficiencies. However, today biomass gasification is gaining world-wide recognition and favor due to the economic and environmental benefits. In terms of economic benefits, the cost of the BioMethane is essentially free, after the cost of the equipment is installed. BioMethane, probably the most important and efficient energy-conversion technology for a wide variety of biomass fuels. The large-scale deployment of efficient technology along with interventions to enhance the sustainable supply of biomass fuels can transform the energy supply situation in rural areas. It has the potential to become the growth engine for rural development in the country.

Principles of Biomass Gasification

Biomass fuels such as firewood and agriculture-generated residues and wastes are generally organic. They contain carbon, hydrogen, and oxygen along with some moisture. Under controlled conditions, characterized by low oxygen supply and high temperatures, most biomass materials can be converted into a gaseous fuel known as producer gas, which consists of carbon monoxide, hydrogen, carbon dioxide, methane and nitrogen. This thermo-chemical conversion of solid biomass into gaseous fuel is called biomass gasification. The producer gas so produced has low a calorific value (1000-1200 Kcal/Nm3), but can be burned with a high efficiency and a good degree of control without emitting smoke. Each kilogram of air-dry biomass (10% moisture content) yields about 2.5 Nm3 of producer gas. In energy terms, the conversion efficiency of the gasification process is in the range of 60%-70%.

Multiple Advantages of Biomass Gasification

Conversion of solid biomass into combustible gas has all the advantages associated with using gaseous and liquid fuels such as clean combustion, compact burning equipment, high thermal efficiency and a good degree of control. In locations, where biomass is already available at reasonable low prices (e.g. rice mills) or in industries using fuel wood, gasifier systems offer definite economic advantages. Biomass gasification technology is also environment-friendly, because of the firewood savings and reduction in CO2 emissions.

Biomass gasification technology has the potential to replace diesel and other petroleum products in several applications, foreign exchange.

Applications for Biomass Gasification

Thermal applications: cooking, water boiling, steam generation, drying etc. Motive power applications: Using producer gas as a fuel in IC engines for applications such as water pumping Electricity generation: Using producer gas in dual-fuel mode in diesel engines/as the only fuel in spark ignition engines/in gas turbines.

Publicly Owned Treatment Works ("POTW's") or Wastewater Treatment Systems

More and more, cities, counties and municipalities are faced with greater environmental compliance issues relating to their municipally-owned landfills, Publicly Owned Treatment Works ("POTW's") or Wastewater Treatment Systems. A city's landfill and/or POTW provide an excellent opportunity for cities to reduce their emissions as well as provide an additional revenue stream. These facilities may have valuable gases that our company recovers and pipes to one of our clean, environmentally-friendly cogeneration or trigeneration energy systems. We solve a city's environmental liabilities (air emissions) and provide a new cash flow simultaneously. We offer turn-key solutions for cities that include the preliminary feasibility analysis, engineering and design, project management, permitting and commissioning. We provide very attractive financing packages for cities that do not add to a city's liability, yet provide a valuable new revenue stream. And, we are also able to offer a turn-key solution for qualified municipalities that includes our company owning, operating and maintaining the onsite power and energy plant.

At the heart of the system is a (Bio) Methane Gas Recovery system similar those used in Flare Gas Recovery or Vapor Recovery Units. Methane Gas Recovery, Flare Gas Recovery, Vapor Recovery, Waste to Energy and Vapor Recovery Units all recover valuable "waste" or vented fuels that can be used to provide fuel for an onsite power generation plant. Our waste-to-energy and waste to fuel systems significantly or entirely, reduces your facility's emissions (such as NOx, SOx, H2S, CO , CO2 and other Hazardous Air Pollutants/Greenhouse Gases) and convert these valuable emissions from an environmental problem into a new cash revenue stream and profit center.

Methane Gas Recovery and vapor recovery units can be located in hundreds of applications and locations. At a landfill, Wastewaster Treatment System (or Publicly Owned Treatment Works – "POTW") gases from the facility can be captured from the anaerobic digesters, and manifolded/piped to one of our onsite power generation plants, and make, essentially, "free" electricity for your facility's use. These associated "biogases" that are generated from municipally owned landfills or wastewater treatment plants have low btu content or heating values, ranging around 550-650 btu's. This makes them unsuitable for use in natural gas applications. When burned as fuel to generate electricity, however, these gases become a valuable source of "renewable" power and energy for the facility's use or resale to the electric grid.

Additionally, if heat (steam and/or hot water) is required, we will incorporate our cogeneration or trigeneration system into the project and provide some, or all, of your hot water/steam requirements. Similarly, at crude oil refineries, gas processing plants, exploration and production sites, and gasoline storage/tank farm site, we convert your facility's "waste fuel" and environmental liabilities into profitable, environmentally-friendly solutions.

Our Methane Gas Recovery systems are designed and engineered for these specific applications. It is important to note that there are many internal combustion engines or combustion turbines that are NOT suited for these applications. Our systems are engineered precisely for your facility's application, and our engineers know the engines and turbines that will work as well as those that don't. More importantly, we are vendor and supplier neutral! Our only concerns are for the optimum system solution for your company, and we look past brand names and sales propaganda to determine the optimum system, which may incorporate either one or more; gas engine genset(s) or gas turbine genset(s), in cogeneration or trigeneration mode – in trigeneration mode, we incorporate absorption chillers to make chilled water for process or air-conditioning, fuel gas conditioning equipment and gas compressor(s).

Our turn-key systems include design, engineering, permitting, project management, commissioning, as well as financing for our qualified customers. Additionally, we may be interested in owning and operating the flare gas recovery or vapor recovery units. For these applications, there is no investment required from the customer.

For more information, please provide us with the following information about the flare gas or vapor:

• Type of gas being flared or vented (methane, bio-gas, digester, landfill, etc.).
• Chromatograph Fuel/Gas analysis which provides us with the btu's (heating value) and the composition of the gas and its' impurities such as methane (and the percentage of methane), soloxanes, carbon dioxide, hydrogen, hydrogen sulfide, and any other hydrocarbons.
• Total amount of gas available, from all sources, at the facility.