Cap and Trade: Will It Work?

As the arguments against the reality of global warming become less vociferous under the barrage of scientific data, and the certainty of carbon emissions being the main culprit is grudgingly accepted by even the most outspoken deniers, policy makers are (finally) gearing up to begin taking steps.

Seemingly across the board, experts and legislators alike are warming to the idea of adapting the same type of approach to reducing carbon emissions that became the core of the Kyoto Protocols, that being a system of Cap and Trade.

This system a) places an immediate cap on the growth of volume of emissions, while b) allotting permits to industry which can be traded in a method that (theoretically) would incentivize the steady reduction from the current level of emissions and also provide an economic buffer to minimize negative impacts of these necessary reductions.

As with many great ideas, there are some drawbacks. In the days when many (American) leaders sought to justify the avoidance of signing the Kyoto Protocols, a few of their arguments were the danger of fluctuating value of credits and the likelihood of permit-swapping undermining the actual reduction of emissions, while still placing economic strain on participants. It now appears they may have been at least partially right, as some European countries are finding out for themselves.

Here's what happens: to protect industry from the potentially debilitating rise in the price of carbon credits, the government sets the maximum price at let's say $7.00 per ton. Some companies will find it cheaper to just buy the credits than actually reducing their carbon emissions, while others spend money to actually cut their emissions. But then the price of the credits drops a few dollars, causing more companies to buy the credits instead of doing what we need them to do, which is cutting their emissions.

If you think our legislation will be strong enough to counter this, think again. This White Paper describing the scope of our plan is riddled with statements like:

it is important to design a fair program that obtains the maximum emission reductions at the lowest cost and with the least economic disruption


If emissions from certain activities cannot be measured accurately, it may not be possible to require a regulated entity to turn in allowances to cover those emissions

If this system is to work the way we need it to work, there must be teeth in it. Carbon must be taxed in a way that genuinely pushes industry to clean itself up.

Whether it's a straight-up carbon tax that can only be lowered by lowering carbon emissions, or a method for ensuring that actual reductions are nearly always cheaper than buying credits, or some other method for forcing reductions, we can't play the "as long as it doesn't hurt" game anymore.

It's already hurting us, and it's already costing us more than we (and our children) can afford.


The answer to your headline question:

No. It will not work. It is a shell game at best, with only the faint illusion of making a difference. But people mistake it for real action and we end up with all manner of cap and trade initiatives that effectively to little to reduce damaging pollutants.

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I agree, James

And I'm not even sure how many:

people mistake it for real action

as opposed to knowing it won't help reduce greenhouse gases but they get on the bandwagon anyway as a political move to make it appear (to voters) that they are doing something.

I don't like the trading idea either.

I like the idea of aggressive caps followed by huge amounts of spending on alternative energy research and production.

One of the pitfalls of childhood is that one doesn't have to understand something to feel it. - Carlos Ruiz Zafon

Jesus Swept ticked me off. Too short. I loved the characters and then POOF it was over.

Not really a commodity,

in the classic sense, even though the plan encourages trading.

The maximum price idea is the protectionist influence, to minimize the economic impact on the companies who have more difficulty cutting their emissions, and to keep others from profiting too much at the expense of those folks.

I'll try to find the link later, but the $7.00 per ton example I gave was derived from a summary of a few different proposed plans from back in 2004 that have been circulating, and it also cited a few examples of how it would cost around $25.00 per ton for some of the dirtier industries to clean up.