June 1, 2009
Series Editor: Ian Parry
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster
Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.
In this week's commentary, James Hammitt describes what may be the first successful international response to a global environmental threat—depletion of the stratospheric ozone layer. After national spray can bans of the 1970s proved inadequate and the Antarctic ozone hole was discovered in the 1980s, the world community came together to limit, and ultimately eliminate, production of CFCs and other ozone-depleting substances. The story has lessons for how to respond to global warming.
The Successful International Response to Stratospheric
By James K. Hammitt
An international agreement dealing with climate change remains elusive, but as negotiators seek consensus on how to proceed, we can look back to the resolution of an earlier global environmental challenge: ozone. Although it will take decades for the ozone layer to fully recover, the international response to the discovery of stratospheric ozone depletion has been a remarkable success.
Chlorofluorocarbons (CFCs) were synthesized in the 1930s and initially used for refrigeration. By the 1970s, CFCs had found a wide range of applications. The largest quantities were used in aerosol spray cans; home and commercial refrigeration; automobile and room air conditioning; foams for insulation, cushioning, and packaging; and as cleaning solvents. While the number of firms using CFCs was large, production was restricted to a small number of firms, mostly in industrial countries.
Scientific studies in the mid 1970s suggested that CFCs might deplete stratospheric ozone. Because the compounds are chemically stable, they do not break down until they waft into the stratosphere and are exposed to intense ultraviolet radiation. The released chlorine catalyzes a reaction that converts ozone (O3) to molecular oxygen (O2). With less stratospheric ozone, more ultraviolet light penetrates to ground level and damages crops and plastics, causes skin cancer and cataracts, and harms phytoplankton, other plants and animals, and ecosystems.
The industrialized countries of North America and Europe took the lead in developing a global system to control CFC emissions, particularly after the surprise discovery of the Antarctic "ozone hole" in 1985 (although its connection with CFCs had not been firmly established at that point). U.S. industry eventually supported international controls, in part because it feared that in the absence of international rules, new domestic rules would weaken its competitive position. The Montreal Protocol, signed in September 1987, set up an international framework to reduce use of CFCs and other ozone-depleting substances (ODS). Subsequent amendments nearly eliminated production of CFCs and similar compounds by the mid 1990s. HCFCs, which substitute for CFCs in some applications but are less potent ozone depleters, are regulated as transitional chemicals. Their use is being sharply restricted and production must cease by 2030.
ODS Regulatory Systems
Although ODS are dangerous only if they are released to the atmosphere, the protocol regulates production and consumption because these are more easily monitored than emissions. Consumption is not measured but defined as production plus imports minus exports. For the United States, the limits apply at the national level; for the European Union, member states' production and consumption are not limited so long as the union as a whole complies.
U.S. implementation relies on tradable production and consumption permits, supplemented by excise taxes and end-use controls. EPA issues annual permits for production (or import) and consumption to firms that manufacture or import ODS. Allocation is based on historical production or import shares. Permits are defined for each ODS, but intercompound trades based on ozone-depletion potential are allowed within ODS classes. The permits are tradable among firms without restriction and can be banked (saved for later use).
The U.S. command-and-control measures include prohibitions on ODS in certain applications, required equipment and training for refrigeration-service personnel, and prohibitions on selling small quantities of ODS (to prevent use by backyard mechanics). The "significant new alternatives policy" (SNAP) prohibits the replacement of an ODS with certain substitutes if alternative choices would better reduce overall environmental or health risk.
The initial EU regulation imposed a system of tradable production or import permits, similar to the U.S. system. These permits are tradable among firms within or between countries. A further regulation prohibits import of ODS and products containing ODS from countries outside the protocol and includes many end-use restrictions. Some EU member states adopted additional restrictions and economic incentives, such as taxes and deposit-refund schemes to encourage recovery of ODS in certain products.
In the United States and European Union, production and import of CFCs was eliminated by 1996 (with minor exemptions). Production and import of HCFCs is being sharply reduced, with elimination scheduled by 2030.
Assessing the Results
EPA analysis of the rules implementing the Montreal Protocol in the United States estimated that the benefits of fewer fatal skin cancers alone would dwarf the costs of compliance. How well did the regulations work?
Effectiveness. Substantial reductions in CFC consumption were achieved with limited economic disruption. The concentration of ODS in the stratosphere peaked in the 1990s and is anticipated to fall to its prior level by midcentury, with ozone likely recovering to its prior levels around then as well.
Compliance costs. For the United States, the costs of compliance were comparable to EPA's estimates. The market price of CFCs appears to have been lower in the EU, suggesting smaller marginal compliance cost or more stringent command-and-control regulations there. The EU may have had lower costs because the Montreal Protocol required equal percentage reductions from a 1986 baseline. The United States had eliminated most of its aerosol use by then but the EU had not, and so the EU could achieve part of its compliance by limiting aerosol use at relatively low cost.
Administrative burden. Economic-incentive instruments make fewer information demands on regulators than command-and-control instruments. Ensuring compliance with the Montreal Protocol through end-use restrictions alone would have required information on the magnitude of ODS use and technological alternatives for reducing it in each application. EPA estimated that a traditional command-and-control approach would require 32 staff to administer and cost firms $300 million per year in reporting and recordkeeping. In comparison, the tradable-permit system required only 4 staff and cost firms just $2.4 million annually. Illegal imports, however, revealed limitations in monitoring and enforcement.
Burden on industry. U.S. tradable permits were allocated without charge to producers and importers based on their historical market shares. Because the permits were valuable assets, the allocation was a direct benefit, partially offsetting these firms' losses from restrictions on future ODS sales. (Congress later imposed excise taxes, in part to capture some of these rents.) In contrast, ODS-user industries faced higher ODS prices.
Technological innovation. Information exchange among industries, governments, and international organizations helped minimize compliance costs and disruption. Producer and user industries collaborated internationally in safety and performance testing, and diffusion of alternatives was encouraged through trade shows, sometimes with government sponsorship.
Adaptability. The U.S. and EU tradable-permit systems easily incorporated changes each time the Montreal Protocol was amended. The permitted quantities could be reduced more easily and quickly than end-use restrictions could be tightened. In the United States, rulemakings to implement these amendments were completed within a year, substantially faster than most command-and-control rules.
Parallels with Climate Change
The issue of CFCs and stratospheric ozone shares some parallels with the greenhouse-gas problem. In particular, the effects of CFC emissions on stratospheric ozone are the same, regardless of which country releases them. Ozone depletion, like global warming, is a truly global problem. Indeed, the two problems interact: ozone depletion affects global warming and global warming affects ozone depletion. Moreover, ODS and some of their substitutes are themselves greenhouse gases with long atmospheric lifetimes. Hence the benefits of reducing emissions span many future years, while control costs are borne up front. In contrast, negotiating an international regime to control CFCs was immeasurably easier than for greenhouse gases, given that the problem involved only a small number of producing firms and production was concentrated in the industrialized nations.
Experience in resolving the problem of stratospheric ozone depletion shows that nations can work together to confront a global environmental threat, taking costly actions even before significant environmental damages result. The cap-and-trade mechanisms used in the United States and European Union proved effective and could be easily modified as international agreements required more stringent controls. Information sharing between producer and user industries accelerated and reduced the costs of transition.
While the response to ozone depletion provides a salutary model for how to respond to global warming, global warming is a much harder challenge: sources of greenhouse gases (notably fossil fuels) account for a vastly larger share of the world economy than did CFCs and the number of firms and countries that contribute to global warming is far greater.
Andersen, S.O., and K.M. Sarma. 2002. Protecting the Ozone Layer: The United Nations History. London: Earthscan Publications.
Benedick, R.E. 1998. Ozone Diplomacy: New Directions in Safeguarding the Planet, enlarged edition. Cambridge, MA: Harvard University Press.
Hammitt, J.K. 1997. Stratospheric-Ozone Depletion. In Economic Analyses at EPA: Assessing Regulatory Impact, edited by R.D. Morgenstern. Washington, DC: Resources for the Future, 131–169.