Preventing Climate Change: What is “Carbon Cap-and-Trade”?
Scientists generally agree that the Earth is getting warmer. Climate change is expected to have many potentially disastrous effects, including melting polar ice caps (which will raise sea levels and inundate coastal areas), destruction of agricultural productivity, and an increase in the frequency and severity of destructive storms.
The primary cause of global warming is carbon dioxide emitted from burning oil, natural gas and coal, along with a smaller contribution from methane and a few other so-called greenhouse gases. These gases create a “greenhouse effect,” preventing heat from escaping the planet. The result is a slow but steady increase in the Earth's average temperature.
Preventing catastrophic climate change will require the world's economies to dramatically reduce their combustion of fossil fuels. The carbon in these fuels combines with oxygen when combusted to generate the carbon dioxide that is warming the planet; the shorthand term “carbon emissions” is often used since it is the carbon in the fuel that is added to the atmosphere.
Traditional environmental regulation focuses on “command and control” mechanisms to reduce pollution, in which the government establishes specific standards such as pounds of emissions per kilowatt of electricity generated, and uses civil and criminal penalties to enforce the standards. While this has worked to address many environmental issues in the past, it can be economically inefficient and inflexible, and could be problematic for a complex, economy-wide impact like carbon emissions.
Another way to reduce emissions of carbon would simply be to tax fuel use or carbon emissions directly. Economists believe that such an approach would be efficient and effective in achieving the needed reductions. But “tax” is definitely a dirty word in Washington, and it is unlikely that any direct tax of the required magnitude could be passed by Congress.
The Obama administration has proposed a different mechanism for limiting carbon emissions. This plan, known as “cap and trade,” is modeled on a very successful program implemented in the 1990s to reduce emissions of sulfur-containing pollutants that cause acid rain. The government would establish a fixed nationwide limit on the amount of carbon that could be emitted into the atmosphere in a year (the “cap” part of the plan). Permits to emit these compounds would be auctioned, raising revenues and establishing a cost for the use of fossil fuels.
Industries that operate more efficiently from a carbon-emissions standpoint (such natural gas fuel vs. coal) would incur lower costs from the system, encouraging their use. New technologies that that emit little or no carbon, such as solar or wind power that are currently too expensive for widespread use, would receive a competitive advantage that would help them to thrive.
Once the emission permits had been sold, they could be exchanged on the open market, much like stocks or bonds (the “trade” part of the plan). In this way, not only would industries that are more efficient incur lower costs at the outset, but those that improved their efficiency could actually make money as unneeded permits could be sold for a profit.
The nationwide carbon emissions cap would be lowered gradually over time to reduce the nation's output of greenhouse gases. The Obama plan targets a reduction of 80% below 1990 levels by 2050. The reduction would take place over time to allow new technologies to emerge to implement the emission reductions efficiently.
Although it is not directly a tax, a cap and trade plan with auctioned permits would in may ways act like one. It would increase the cost of using energy, which companies would pass on to consumers. Under the Obama plan, a portion the revenues raised from the auction would be reinvested in green technologies and alternative fuels, with the remainder being rebated to consumers to offset the expected increase in energy costs associated with the program. If designed correctly, this would result in a progressive program, with the poor and middle class seeing little impact to their overall finances.
President Obama has included a cap and trade plan in his proposed budget. You can read a fact sheet on the administration's environmental program at the Obama website: http://my.barackobama.com/page/content/newenergy
A further discussion of cap and trade proposals can be found in a recent issue of Mother Jones magazine: http://www.motherjones.com/environment/2009/02/10-ways-trade
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