The Pros and Cons of Cap and Trade

Cap and trade legislation is one of those things that is almost always about to happen.  In a message recorded by then President-Elect Barack Obama for the Governor’s Global Climate Summit in 2008, he promised that the federal government “will start with a federal cap and trade system” that would “set strong annual emissions targets that set us on a course to reduce emissions”. (1)  However, as of the writing of this paper, nearly two years later, no comprehensive legislation on cap and trade has passed into law.

Frequently this debate can go over the ears of the average citizen, and it may be helpful to explain this important legislation in terms of the benefits and costs associated with it.  This paper will provide a description of cap and trade, why cap and trade is desired, some examples of it worldwide, alternatives to cap and trade, and then explain both the pros and the cons of its implementation.  In the end, a comprehensive summary will arrive at the conclusion that cap and trade may be the best option for reducing greenhouse gas emissions, given the high cost of alternatives, the efficiency of the cap and trade system, and the success of this system in the past.

What is Cap and Trade?

Broadly speaking, cap and trade is a shorthand term for regulation which requires companies which are emitting a certain pollutant to collectively hold total emissions at some pre-determined value; they can then either buy or sell permits which allow a certain level of pollution each.  When we speak of cap and trade today, the pollutant we are usually referring to is carbon dioxide, and it is cap and trade of this particular pollutant is what this paper will primarily focus on.  Cap and trade is not limited to carbon dioxide, as we will see later, but that is what debate in the United States currently revolves around.

The most notable attempt at cap and trade legislation in the United States is The American Clean Energy and Security Act (ACES Act). (2)  This bill was passed by the United States House of Representatives on June 28 of 2009, but no comparable bill has been able to make it through the United States Senate.  The closest thing is a similar Senate bill entitled the Clean Energy Jobs and American Power Act. (3)  This bill was presented to the Senate in September of 2009, but has yet to be brought up for debate.  Unfortunately for the bill, the recent shift in political power from Democrats to Republicans in the Senate means that the bill is unlikely to pass during the entirety of the next congressional session. (4)

The ACES Act’s effect on cap and trade is described as follows in the bill’s official summary:

Starting in 2012, ACES establishes annual tonnage limits on emissions of carbon and other global warming pollutants from large U.S. sources like electric utilities and oil refiners. Under these limits, carbon pollution from large sources must be reduced by 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050. To achieve these limits, ACES establishes a system of tradable permits called “emission allowances” modeled after the successful Clean Air Act program to prevent acid rain. This market-based approach provides economic incentives for industry to reduce carbon emissions at the lowest cost to the economy.

Specifically, these permits will be initially distributed then partially auctioned by the government on an annual basis.  The revenue generated from these auctions is intended to be spent on protecting consumers from increased energy costs, assisting industries in transitioning to a clean energy economy, investing in energy efficiency and clean energy, budget neutrality of the ACES Act, worker training, deforestation prevention, and assisting national and international adaptation.

Why Cap and Trade?

Many question the motives of cap and trade legislation.  Of course, the underlying reason for this sort of legislation is to reduce or prevent the effects global climate change.  Therefore, most arguments against cap and trade inevitably lead to one of two topics: climate change, or economics.  The economics of cap and trade will be discussed later, so I would like to use this space to discuss climate change briefly.

The hockey stick diagram, which shows a notable increase in global temperatures.

The nature of earth’s warming atmosphere has been hotly debated for decades.  The famous, or infamous, depending on which side of the argument you find yourself, “hockey stick” diagram was proposed by scientists as definitive evidence of the warming planet. (5)  However, many have expressed criticism that this recent warming trend is anthropogenic, or man-made.  This is an especially true in political circles, where the legislators who have the power to decrease the effects of climate change often express disbelief at the idea.  Recent politicians to make significant moves against climate change include New Jersey governor Christ Christie (6), Wisconsin congressman Jim Sensenbrenner (7), and Ohio congressman John Boehner (8).  All of these politicians are Republicans, signaling a growing chorus among that political party that flatly denies climate change.  However, they often argue as such with little fact-based background, such as Boehner’s insistence that “the idea that carbon dioxide is a carcinogen, that it’s harmful to our environment is almost comical …. Every cow in the world …when they do what they do, you’ve got more carbon dioxide.”  This refrain completely ignores known science about climate change, as well as the nature and source of carbon dioxide.

Current scientific consensus is best summed up by an analysis of 928 papers in the Institute for Scientific Information’s database published between 1993 and 2003 which found no peer-reviewed scientific papers which argued against anthropogenic climate change. (9)  The fundamental argument for climate change, that carbon dioxide is a greenhouse gas, and levels of this gas have been increasing, is no longer in debate.  The debate now centers on the mechanisms that govern our planet’s climate and the effects that increased levels of carbon dioxide will have.

Admittedly, there are many sources of carbon dioxide, from geothermal vents to breathing.  However, the scale of the human addition to the level of carbon dioxide in the atmosphere is often misrepresented.  To give a sense of how much carbon dioxide we produce, consider that the Department of Energy’s Energy Information Administration calculated the amount of carbon dioxide produced annually from the burning of fossil fuels at 29 billion metric tons, compared to just 65-319 million metric tons per year from volcanoes. (10)  There are many, many natural sources of carbon dioxide, but the common refrain that volcanoes contribute more to atmospheric carbon dioxide levels is simply untrue.  Humans now have a significant impact on our atmosphere, enough so to change our climate.

Furthermore, there are those who argue that carbon dioxide is not the most powerful greenhouse gas, and they are correct.  In fact, the innocuous water vapor molecule has a much more drastic effect on the planet’s climate.  It’s interesting to note that rising carbon dioxide levels will cause more evaporation from oceans, which will cause more water vapor, creating a positive feedback which will raise global average temperature overall. (11)  Also, stratospheric levels of water vapor do not seem to offer much protection from global warming, as the warming trend continues unabated by that particular water vapor. (12)  At the same time, there are those who argue that clouds would provide a negative feedback; it is this constant uncertainty about the mechanics of our global climate that create some skepticism about climate change.

Examples of Similar Legislation

Cap and trade is not a new idea.  While federal legislation to this effect has yet to succeed, there are many examples in the world, and even in our own country, of this legislation being enacted.  This can give us an idea of the effect of national cap and trade legislation.

The Western Climate Initiative is a collaboration between California, Oregon, Washington, Montana, Utah, Arizona, New Mexico, Quebec, Ontario, Manitoba, and British Columbia to work together to reduce greenhouse gas emissions.  They intend to do this by developing a cap and trade system, issuing offset credits, promoting energy efficiency, and implementing clean car standards.  (13)  So far, only California has drafted true cap and trade legislation, a bill which offers to give away credits and allow carbon offsets to keep costs low in a down economy. (14)  The California plan to cut greenhouse gas emissions was under attack in the last election, but Proposition 23, mostly funded by oil giants, was soundly rejected by voters and their plans continue apace. (15)

Schwarzenegger and others sign the WCI agreement. (Image: AP)

The Regional Greenhouse Gas Initiative (RGGI) is a similar project among Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont.  The RGGI has already begun auctioning carbon emission credits, and the next auction is scheduled for December 1, 2010.  The proceeds from these auctions are used to fund energy efficiency and clean energy initiatives throughout the RGGI member states. (16)  The target reduction of the RGGI is 10% by 2018.

Illinois is a member of the Midwestern Greenhouse Gas Reduction Accord, which also includes Iowa, Kansas, Manitoba, Michigan, Minnesota, and Wisconsin.  While finalized rules have not been drafted, early estimates of the effect of a cap and trade program in this region are a .7% reduction in the growth of the gross regional product.  (17)  Note that this is only a reduction in the rate of growth — the gross regional product is still expected to increase.  This may be taken as evidence that the drastic economic effects often described by those opposed to cap and trade are greatly exaggerated.

The largest single carbon market in existence today is the European Union Emission Trading Scheme (EU-ETS).  Faced with an inability to meet Kyoto Protocol targets to reduce greenhouse gas emissions and the failure of an attempted carbon tax, the EU seems like an unlikely forebear of the carbon market methodology.  However, when the US failed to sign the Kyoto Protocol, it signaled a chance for the EU to lead the way; the many countries in the EU who favored emissions trading were able to lead a charge.  The idea of a carbon market was preferred over command and control or carbon tax methods, which would have drastically increased costs for businesses.  Industry support lead to the bill’s eventual passage into law.  (18)  Early problems with the EU-ETS include an over-allocation of emissions credits which caused the value of the credits to plummet to zero, and an actual increase in the level of emissions in the first session of the EU-ETS.  This has led to some public backlash and some feel that the EU-ETS is not working to reduce emissions.  Hopefully, these problems will be overcome in the future.

One final example of cap and trade legislation is a national federal program in the United States which was vastly successful: the Acid Rain Program (ARP).  The stated goal of this EPA program is to “achieve significant environmental and public health benefits through reductions in emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx)”. (19)  Very simply, the program sought to reduce the damage caused by acid rain, and did so by creating a cap and trade system for sulfur dioxide and nitrogen oxide emissions.  Overall, the system has been very successful, causing improvements in air quality, acid deposition, and surface water chemistry. (20)  It is this program’s success which is leading many to believe that a similar system can help to reduce emissions of carbon dioxide.

Alternatives to Cap and Trade

Cap and trade is not the only way to reduce greenhouse gas emissions.  Briefly, I will explore two alternatives which are frequently discussed.

Firstly, there is command and control legislation.  This legislation creates a policy that dictates a certain action, such as requiring emissions to be below some mandatory level. (21)  This type of approach is usually shunned in favor of cap and trade, as cap and trade is more efficient.  For example, if all coal plants in the United States emit 20 metric tons of carbon dioxide (mt CO2), and the desired goal is 15 mt CO2 each, then command and control legislation would dictate this level and fine all those who exceed it.  However, some plants may be able to reduce their emissions at a lower cost than others.  In a cap and trade system, those who are able to reduce their emissions at a lower cost can reduce emissions below the required level and then sell the rights to the unused pollution to another plant who would otherwise have to perform costly upgrades to reduce emissions.  This reduces the overall cost to society of the legislation, creating a more efficient system in economic terms.

One other alternative is a carbon tax.  The carbon tax places a per-unit fee on goods and services which is proportional to the amount of carbon emitted in the production or consumption of that product. (21)  While this is a feasible way to reduce carbon emissions, as people will consume less and firms will seek to reduce carbon emissions, it suffers from the same inefficiency as command and control legislation.  Also, as companies pass the cost of this tax to consumers, the cost of energy and carbon-intensive processes will rise noticeably.  The decreased efficiency means that consumers will pay a higher price for goods under this system than they will under cap and trade.  It is because of these inherent inefficiencies in alternatives to cap and trade which makes cap and trade so appealing.

Pros of Cap and Trade

As mentioned before, the main draw of cap and trade is its efficiency.  Companies which can reduce their emissions at a low cost will do so, and sell the emissions credits to companies who cannot.  This is the “trade” aspect of the program.  The “cap” part reflects the fact that there is some given level of emissions which is a maximum.  This maximum is pre-determined, and a certain number of emissions credits are made available to businesses in a variety of ways; frequently, these credits are either auctioned or given away.  By gradually decreasing the maximum level of emissions, long-term goals to reduce emissions can be met.  This maximum level can be decreased, for example, by government purchases of emissions which are then “retired”, or removed from the market.  Furthermore, pro-environmental groups can purchase and retire credits to decrease the harmful effects of climate change.  Simply put, the major benefit of cap and trade is that it is inherently efficient.

Another benefit is the possibility of increased governmental revenue.  By auctioning emissions credits, the government is able to make a profit on what is cynically called the “right to pollute”.  However, the profits from these auctions can be used to further energy efficiency or make energy more affordable for low-income families, as mentioned before in the ACES Act.  This is an especially beneficial outcome given the current budget deficit in the United States.  It should be noted that the carbon tax would also have this outcome.

Cons of Cap and Trade

For all the benefits of cap and trade, it is not without its drawbacks.  Larry Lohman wrote in New Scientist that carbon trading “encourages the industries most addicted to coal, oil and gas to carry on much as before” because it is possible to purchase cheap offsets or carbon credits rather than to switch from fossil fuels to renewable energy. (22)  While this may be true, Lohman’s alternative is a radical restructuring of the world economy and society in order to create a low-energy planet.  It is unlikely that the political or social structures currently in place would accommodate such a change.  In truth, working with the capitalist system rather than against it would benefit society much more.

Annie Leonard, who created “The Story of Cap & Trade”, argues that carbon offsets encourage companies to cheat, allows companies who’ve been polluting to continue as normal, and distracts from the bigger picture. (23) Leonard’s criticisms stem from much the same place as Lohman’s, and are probably not realistic.  Leonard proposes as an alternative “solid caps [on carbon emissions], strong laws, citizen action, and carbon fees”.  While placing rigidly-enforced caps on emissions may be effective from an environmental standpoint, such methods would reduce emissions at a very high price, making the cost of energy much higher for the consumer.  However, citizen action is a very strong force, and is likely to be a necessary component of any effective attempt to reduce emissions, no matter the methodology chosen.

Summary and Analysis

I believe the United States should pursue cap and trade to reduce emissions of carbon dioxide and other greenhouse gases.  Determined environmentalists are likely to claim that this method does not go far enough; profit-maximizing corporations are likely to protest that this will kill jobs and raise prices.  As with so many polarizing debates, the truth lies somewhere in the middle.

Cap and trade is the most economically efficient way to reduce greenhouse gas emissions.  While command and control legislation would ensure that we meet certain limits with severe penalties for companies who do not comply, this would come at a high cost to both business and the consumer.  The ability for carbon credits to be traded allows for companies to reduce emissions in the most cost-effective manner, and the gradual reduction in the number of these credits will help the United States meet reductions in greenhouse gas emissions as recommended by organizations such as the United Nations Framework Convention on Climate Change, who recommend a reduction in emissions of 80% by 2050. (24)

This legislation is needed because the evidence that mankind’s actions are having a measurable impact on the climate of the planet has piled up to the extent as to be undeniable.  The degree of the impact and the results of inaction may be uncertain, but I see no way that mankind can ethically continue to pollute as it has.  The scientific literature is quite certain, and now the only step between us and a safer future is action.  Cap and trade is a necessary step to the end goal of a carbon-neutral society.

This program has been proven to be effective.  Several states are pursuing effective cap and trade plans in the United States, and in Europe the EU-ETS has proved to be a strong tool in reducing climate change, even if it has had some rough spots in its history.  Also, the Acid Rain Program has been shown to be highly effective in reducing damage from emissions, and uses the same methodology we are discussing today to reduce merely a different type of pollution.  We should learn from the mistakes made in the implementation of the EU-ETS, benefit from the experience gained through the Acid Rain Program, and implement a carbon trading system.

To conclude, I can only say that cap and trade legislation is a necessary step for our nation. It is the most likely and most beneficial manner in which to reduce carbon dioxide emissions.  The effects of carbon dioxide emissions are known, and to continue to act unabated is an ethical crime which will certainly not bear well upon us when reviewed by future generations.  Cap and trade is certainly not ideal; we would all like for a solution that will reduce greenhouse gas emissions but not require cost increases for energy and consumer goods.  However, in the real world we do not find solutions which are ideal.  This is as true in society as it is in physics.  There is a hidden cost in not taking action, one which increases every day.  We can bring this cost down and perhaps even mitigate it by taking decisive action to reduce greenhouse gas emissions.  Business-as-usual is not an acceptable alternative.  We must make the difficult choice; to act, rather than to live in denial of the science as we know it.

This paper was originally submitted as an assignment for an Energy & Climate Change class.

Works Cited

1. Obama, Barack. A New Chapter on Climate Change via Change.gov. YouTube. [Online] November 17, 2008. [Cited: November 8, 2010.] http://www.youtube.com/watch?gl=IT&hl=it&v=hvG2XptIEJk.

2. Henry A. Waxman, Edward J. Markey. American Clean Energy and Security Act. U.S. House of Representatives, Committe on Energy and Commerce. [Online] June 28, 2009. [Cited: November 8, 2010.] http://energycommerce.house.gov/index.php?option=com_content&view=article&id=1633&catid=155&Itemid=55.

3. John F. Kerry, Barbara Boxer, Benjamin L. Cardin, Paul Grattan Kirk. Clean Energy Jobs and American Power Act . Library of Congress: Bill Summary and Status. [Online] September 2, 2009. [Cited: November 8, 2010.] http://thomas.loc.gov/cgi-bin/bdquery/z?d111:S1733:.

4. Holan, Angie Drobnic. Election Day signals the end for cap and trade. Politifact. [Online] November 8, 2010. [Cited: November 8, 2010.] http://www.politifact.com/truth-o-meter/article/2010/nov/08/election-day-seals-fate-cap-trade/.

5. Michael E. Mann, Raymond S. Bradley, Malcolm K. Hughes. Northern Hemisphere Temperatures During the Past Millennium: Inferences, Uncertainties, and Limitations. National Climatic Data Center. [Online] February 14, 1994. [Cited: November 10, 2010.] http://www.ncdc.noaa.gov/paleo/pubs/millennium-camera.pdf.

6. Stein, Sam. Chris Christie Skeptical That Global Warming Is Caused By Humans. The Huffington Post. [Online] November 10, 2010. [Cited: November 10, 2010.] http://www.huffingtonpost.com/2010/11/10/chris-christie-global-warming_n_781494.html.

7. Frommer, Frederic J. Jim Sensenbrenner: Global Warming Committee Should Be Used to Rein in Obama Administration on Climate Change. The Huffington Post. [Online] November 8, 2010. [Cited: November 10, 2010.] http://www.huffingtonpost.com/2010/11/09/jim-sensenbrenner-global-_n_780894.html.

8. Lewison, Jew. Boehner: Cow farts demonstrate CO2 is safe. DailyKos. [Online] April 20, 2009. [Cited: November 10, 2010.] http://www.dailykos.com/story/2009/4/20/722089/-Boehner:-Cow-farts-demonstrate-CO2-is-safe.

9. Oreskes, Naomi. Beyond the Ivory Tower: The Scientific Consensus on Climate Change. Science. [Online] December 3, 2004. [Cited: November 10, 2010.] http://www.sciencemag.org/cgi/content/full/306/5702/1686#.

10. S., Andy. Do volcanoes emit more CO2 than humans? Skeptical Science. [Online] August 30, 2010. [Cited: November 10, 2010.] http://www.skepticalscience.com/volcanoes-and-global-warming.htm.

11. Cook, John. Water vapor is the most powerful greenhouse gas. Skeptical Science. [Online] June 26, 2010. [Cited: November 10, 2010.] http://www.skepticalscience.com/water-vapor-greenhouse-gas-intermediate.htm.

12. —. What is the role of stratospheric water vapor in global warming? Skeptical Science. [Online] June 26, 2010. [Cited: November 10, 2010.] http://www.skepticalscience.com/water-vapor-stratosphere-global-warming.htm.

13. Western Climate Initiative. Clean Energy: Creating Jobs, Protecting the Environment. Western Climate Initiative. [Online] May 24, 2010. [Cited: November 12, 2010.] http://www.westernclimateinitiative.org/component/remository/general/WCI-Brochure-%28May-2010%29/.

14. Henderson, Peter. California unveils greenhouse gas trading plan. Yahoo! News. [Online] October 29, 2010. [Cited: November 12, 2010.] http://news.yahoo.com/s/nm/20101029/us_nm/us_carbon_california.

15. Bond, Becky. California Voters Say Hell No to Texas Oil and Proposition 23. The Huffington Post. [Online] November 2, 2010. [Cited: November 12, 2010.] http://www.huffingtonpost.com/becky-bond/california-voters-say-hel_b_778025.html.

16. Regional Greenhouse Gas Initiative. Welcome. RGGI.org. [Online] 2010. [Cited: November 12, 2010.] http://www.rggi.org/home.

17. ICF International. Summary of the Midwestern Accord Economic Modeling Results. Midwestern Greenhouse Gas Reduction Accord. [Online] 2010. [Cited: November 12, 2010.] http://www.midwesternaccord.org/Modeling_Summary.pdf.

18. Frank Convery, Christian De Perthuis, Denny Ellerman. The European Carbon Market In Action: Lessons From The First Trading Period. Interim Report. MIT: Center for Energy and Environmental Policy Research. [Online] March 2008. [Cited: November 12, 2010.] http://tisiphone.mit.edu/RePEc/mee/wpaper/2008-002.pdf.

19. EPA. Acid Rain Program. Environmental Protection Acency. [Online] April 14, 2009. [Cited: November 15, 2010.] http://www.epa.gov/airmarkt/progsregs/arp/index.html.

20. —. Acid Rain Program 2009 Progress Reports: Environmental Results. Environmental Protection Agency. [Online] October 29, 2010. [Cited: November 15, 2010.] http://www.epa.gov/airmarkt/progress/ARP09_3.html.

21. Harris, Jonathan M. Environmental and Natural Resource Economics. Boston : Houghton Mifflin, 2006.

22. Lohman, Larry. Carry on Polluting. New Scientist. 2006, 2580.

23. Leonard, Annie. The Story of Cap & Trade: Annotated Script. The Story of Stuff. [Online] 2009. [Cited: November 15, 2010.] http://www.storyofstuff.com/capandtrade/_images/pdfs/annie_leonard_footnoted_script.pdf.

24. UNFCCC. Dialogue on long-term cooperative action to address climate change by enhancing implementation of the Convention. United Nations Framework Convention on Climate Change. [Online] November 6, 2006. [Cited: November 15, 2010.] http://unfccc.int/files/meetings/dialogue/application/pdf/wp_20_add.1_e.pdf.

(Header photo credit davipt)

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The Pros and Cons of Cap and Trade by Steve Richey is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

5 Comments

  1. AL

    Very thorough article! Well written. I am am about the state of the govt (both state and federal) levels that corrupt politicians resort to cap-and-trade as means for tax revenues (from carbon trading) and revenues form other means. This is so immoral. Who owns the sky? There are many ways to reduce pollution, including shutting down companies that kept polluting, but, no, it has to be the capitalistic way.

    Thanks again for the article.

  2. Pingback: Science and Society | Case 43: Trading Pollutants

    1. Steve

      The “hockey stick graph” was published in a peer-reviewed academic journal. If you have a reference from a peer-reviewed academic journal that discredits this graph, please let me know. The controversy surrounding this graph relates to the lack of error bars in some reproductions, which are present in this case.

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