Carbon Cap-and-Trade: Can it Succeed?
Joshua Lariscy
Greenhouse gas emissions and global climate change are some of, if not the most, salient environmental issues in the world today. Ever since scientists began to take notice of a trend in increasing temperatures worldwide, greenhouse gases, particularly carbon dioxide, have been increasingly the target of new regulation and research. Governments, NGO’s, and scientists all over the world have proposed new ideas to lower levels of carbon dioxide emitted. These include possibilities such as a direct carbon tax on industries and consumers, building carbon capture and storage into power generation, and promoting mass public transportation systems. Among these innovative solutions there is a system of CO2 emission reduction called cap-and-trade.
Cap-and-trade is a market based solution that can be applied to many different social, economic, and environmental problems: particularly those involving non-excludable common resources, such as fisheries, forest management, and in this case emissions. It operates by setting a limit, or cap, on the total amount of emissions that will be allowed within a set period of time, usually a year. The government usually defines a certain emissions reduction goal that it would like to meet by a certain year and derives a cap that reduces each year. Then, the government issues a large number of permits, with each permit allowing the emitter to emit a certain fraction of the total emissions cap. These allowances are initially either allocated freely or auctioned off to emitters.[1] The process of setting the cap and issuing permits is not simple: finding a cap that can meet goals but not put an impossible burden on emitters is difficult, as well as determining the right number of permits to issue so as not to flood the market and drive the price down. Permits can be openly traded between emitters, and, in theory, demand would drive up the price for allowances. By effectively putting a price on carbon emissions, businesses and corporations can either buy allowances or find ways to cut the levels of their emissions. The hope is that the higher cost of buying carbon permits pushes industries and emitters to develop new and more efficient technology that puts less carbon in the atmosphere. The cap-and-trade method differs from direct regulation in that it allows flexibility among those creating emissions to find ways to reduce emissions or increase efficiency. Strict command-and-control regulation simply imposes a hardline tax on carbon emissions, and do not necessarily spur the development of technology like cap-and-trade can.
In the real world, cap-and-trade systems have existed and continue to be implemented to varying degrees of success and critical reception. In the 1990s, the EPA released the Acid Rain Program under the Clean Air Amendments, setting up a cap-and-trade system for SO2 and NOx emissions. The program has had great success, with the EPA claiming that SO2 ambient air levels decreased by as much as 40% by the year 2002, and NOx emissions decreasing 33% over the same time period.[2] Furthermore, the health benefits estimated by the EPA from the decrease of these air pollutants is over $70 billion annually. However, the success of the Acid Rain Program does not reflect the difficulties inherent in comparable CO2 emission schemes today. Acid rain was a much more visible and salient issue in the eyes of the public, whereas greenhouse gases and climate change has, currently, less visible effects and has had a history of controversy over the science behind it. Still, the development of cap-and-trade systems for carbon emissions has continued.
The most notable of these emission markets is the European Emissions Trading System (EUETS). It is currently in Phase 3 of its development, which will run until 2020, utilizing an EU-wide cap on emissions and currently auctioning more than 40% of its initial permits.[3] Since its inception in 2005, the trading scheme has had its fair share of critics. Some say that the fact that they have had to change the specific numerical emissions goals is evidence of a weak plan, or that acting solitarily with their plan instead of in global cooperation means that the system’s overall effect on emissions will not be significant.[4] Barack Obama pushed for a U.S. national cap-and-trade system in 2010, but the plan failed to pass in the Senate due to Republican opposition. Pundits point toward the issues with the European system such as the fluctuation of the price of carbon that the free trade of permits allow. Others believe that cap-and-trade is being used as a political tool, saying that the government markets cap-and-trade as an effective solution in order to appease environmentalists, while glossing over its potential drawbacks and failures.
Despite many of these claims, cap-and-trade is still a viable and potentially effective emissions tool, if designed and implemented well. Though there is a lack of a national plan, two areas in the U.S. have successfully established their own trading systems. In the Northeast, the Regional Greenhouse Gas Initiative was started in 2008, initially involving the participation of nine states. Within the states, only electric power plants with capacities of 25 megawatts or greater took part in the cap-and-trade system. In 2014, they experienced their most successful initial auction of emission permits yet, selling 100% of their total permits for their highest clearing price yet.[5] The plan had been struggling in past years, but a decision to lower the cap stimulated the market and raised the price of the carbon permit. With their new Clean Power Plan, the first set of carbon emission limits for power plants, the EPA aims to reduce CO2 emissions by as much as 30% by 2030.[6] States participating in the RGGI hope to only make a slight adjustment to their market cap in order to begin complying with the new standards.
California is another state that is taking the initiative by creating its own cap-and-trade system state-wide. Beginning in 2013, the system has had great success thus far due to a well-designed plan. Permit auctions occur quarterly instead of yearly and the cap remains flexible so that they can one day hope to include all sources of emissions in the system.[7] Currently, only businesses or industries that emit more than 25,000 tons of CO2 per year are required to participate in the program. The system is spurring investment into cleaner energy and technology, as well as allowing the economy to continue recovering. California’s plan is far from perfect: they originally intended to partner with more Western states and will likely encounter problems with management of the allowances and permit price. However, a linkage to Quebec’s cap-and-trade plan in January 2014[8] and the fact that California’s plan is working shows that the fundamental concept of cap-and-trade is not a necessarily flawed one and can exist in non-unilateral cooperation.
Many different solutions exist that address the problem of emissions. While cap-and-trade can have success regionally, global cooperation is the ultimate goal, and a vital one, toward reducing overall levels of carbon dioxide in the atmosphere and making progress toward climate change. When designed carefully, the trade market provides a flexible and strong tool in the struggle against global warming.
[1] Center on Budget and Policy Priorities, “Policies to Reduce Greenhouse Gas Emissions” (accessed February 17th, 2015); available from http://www.cbpp.org/cms/?fa=view&id=3167
[2] EPA, “Cap and Trade: Acid Rain Program Results” (accessed February 23rd, 2015); available from http://www.epa.gov/capandtrade/documents/ctresults.pdf
[3] European Commission, “Climate Action: The European Emissions Trading System” (accessed February 17th, 2015); available from http://ec.europa.eu/clima/policies/ets/index_en.htm
[4] Annie Yu, “U.S. watches as EU struggles with ‘cap-and-trade’” (accessed February 17th, 2015); available from http://www.washingtontimes.com/news/2013/jul/4/us-watches-as-eu-struggles-with-cap-and-trade/?page=all
[5] Jeff Spross, “The Northeast’s Cap-and-Trade System Just Had Its Most Successful Auction Ever” (accessed February 17th, 2015); available from http://thinkprogress.org/climate/2014/06/06/3446085/rggi-latest-auction-success/
[6] Alan Neuhauser, US New and World Report, “EPA Chief: Carbon Regs Fulfill Moral Obligation to Act” (accessed February 23rd, 2015); available from http://www.usnews.com/news/articles/2014/06/02/carbon-limits-fulfill-moral-obligation-to-act-on-global-warming-epa-chief-says
[7] Emily Renya, EDF Energy Exchange, “Four Reasons California Cap and Trade Had an Extraordinary Year” (accessed February 17th, 2015); available from http://www.forbes.com/sites/edfenergyexchange/2014/01/08/four-reasons-california-cap-and-trade-had-an-extraordinary-first-year/
[8] California EPA, “Linkage” (accessed February 23rd, 2015); available from http://www.arb.ca.gov/cc/capandtrade/linkage/linkage.htm