Countries are doing it. States are doing it. And groups of both are doing it. It only stands to reason that we (the U.S.) will be doing it some day, especially if the Republicans win. So what is a cap and trade program as it pertains to climate change?
There is nothing mysterious here, Cap and Trade is straightforward. An institution, a state or country, decides how much pollution they should be putting into the atmosphere and by what time in the past they exceeded their limit or at what level they will put a “cap” on their emissions. The objective normally is to return to some past level and better it by cutting emissions even further.
The institution normally gives out permits to various businesses. Those that put out emissions that stay just under their annual permitted amount see no change. Those that achieve targeted reductions can sell their excess permits to other businesses that need more time. In this way, companies can make money on the permits they can sell and other companies can buy themselves more time to achieve their required level. This is the business of selling and buying the permits.
Typically the cap is divided amongst various industries with each having a “cap” for their kind of business with all caps totaling the amount of carbon emissions the institution will allow to be generated during the year. The caps in each industry shrink over time cutting the industry’s overall emissions over a number of years. In this way there is a belief that a cap and trade system gives all players another layer of motivation to achieve desired outcomes.
This sounds easy right, but it isn’t. The problem is that all pieces of the puzzle can be moved or changed to advantage various parties. So far California, the European Union and a host of other players have implemented different plans with a variety of outcomes. Others have announced plans they will institute in the future, like China.
Most people that have looked at cap and trade systems and other alternatives prefer a more straightforward tax on emissions. Never-the-less cap and trade systems are still favored by many businesses, politicians and by the finance community. They see them as something that can be “gamed” to an advantage by sharp people who can manipulate the political entities and regulators who set up and administer these programs.
Politicians and power companies like cap and trade systems because they mask that customer costs for power will go up dramatically. Their greatest fear is that the public will understand that the politician’s and power company’s actions are raising the consumer’s costs. The cap and trade mechanism hides that power companies will just pass on additional costs to its ratepayers as higher prices. This is a much sneakier way of raising costs for energy than just implementing an energy tax. No one wants to be the cause of higher prices.
Cap and trade has a checkered past. The California and European systems represent the best and worst of cap and trade plans. The European system is known as the Emission Trading System (ETS) and is the world’s largest such system.
There are more than 25 countries in the European Union and each country gave out too many permits to their industries. The politicians wanted to make their industries more competitive. Unfortunately they all felt that way and given they were afraid of their constituencies knowing they were the cause of higher prices, they all gamed the cap and trade system.
Critics point out that for much of the ETS history the prices generated have been so low that utilities have been dis-incented and made no progress on reducing their emissions. This is because they found it less expensive to run coal-fired plants than to switch to less polluting natural gas.
The California system is more successful because it is administered by the California Air Resources Board (ARB). This takes it out of the hands of politicians and puts it in the hands of bureaucrats that will make it work. While it remains much more complex and still allows the politicians to hide from rising prices, it is much more successful and has elements that are being copied around the world.
We must be realistic. Whether it is the result of a direct tax or a cap and trade system, energy prices to consumers will go up as power companies pass increased costs on to the consumer. Smart politicians will act now and put the effects of their actions out in the future so they will not be associated with charges during their political tenure. We, and especially our children, will all pay for climate change and coping with it.
But if we know we are going to pay for it and that sooner is cheaper than later, we will support higher charges now rather than even higher prices later. This is where knowledge and willingness collide to produce progress. We must act. Very smart people once asked, “If not now, when and if not us, whom?”
Use the following links to access more information or see the original documents used as the basis of this article.