Why cap and trade doesnt work

In carbon dioxide's case, the heat-trapping greenhouse gas mixes into the upper atmosphere and has a global effect. Reducing emissions locally lowers levels around the world. The total amount of the cap is split into allowances, each permitting a company to emit one ton of emissions. You'd have to drive 2, miles, roughly the distance between New York and Las Vegas, to emit that much carbon dioxide. The government distributes the allowances to the companies, either for free or through an auction.

The cap typically declines over time, providing a growing incentive for industry and businesses to reduce their emissions more efficiently, while keeping production costs down. Companies that cut their pollution faster can sell allowances to companies that pollute more, or "bank" them for future use. This market — the "trade" part of cap and trade — gives companies flexibility. It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation.

As companies use established techniques to lower emissions, such as adopting energy-efficient technology, entrepreneurs see opportunity. Despite the system's questionable results, the costs are considerable. Substantial changes are planned for the European regime, with emissions caps to be set by a single EU body rather than national governments, more than half of permits to be auctioned, and the aviation sector and possibly shipping to be included. Household consumption and private transport cannot be included in the ETS as set up, although the idea of extending the concept to the allocation of personal carbon allowances is popular with some.

But these are only cosmetic changes to an inherently flawed system. The auctioning of permits may avoid overallocation but instead saddle industry with huge upfront costs. The entire scheme will remain vulnerable to political interference and thus likely fail to reduce carbon emissions. The only certainty is that it will hurt the economy and drive up energy costs. If passed, the U. Before signing any bill which would reduce America's competitiveness for little real impact on emissions, President Obama may want to heed the warning of Europe's experience.

All Rights Reserved. Skip to Main Content Skip to Search. For example, both could result in large wealth transfers from coal and manufacturing states to other parts of the country. However, through special tax provisions or the use of allowance value, either can be designed in a way to mitigate adverse impacts on disadvantaged groups.

Similarly, both systems would require special provisions to avoid imposing requirements on GHGs that are consumed as feedstocks or to provide credit for reductions that result from capturing and storing carbon or expanding carbon sinks. Both require monitoring, reporting and verification. Both systems require similar data on emissions, reporting and verification of that data, and enforcement in the event of noncompliance.

Cost certainty v. By setting a cap and issuing a corresponding number of allowances, a cap-and-trade system achieves a set environmental goal, but the cost of reaching that goal is determined by market forces. In contrast, a tax provides certainty about the costs of compliance, but the resulting reductions in GHG emissions are not predetermined and would result from market forces.

Compliance flexibility for firms. A tax requires a firm each year to decide how much to reduce its emissions and how much tax to pay. Under a cap-and-trade system, borrowing, banking and extended compliance periods allow firms the flexibility to make compliance planning decisions on a multi-year basis.

Impact of economic conditions. Under a cap-and-trade system, reduced economic growth would lower allowance prices. Under a tax, government action to lower the amount of the tax, not market forces, would be required to reduce the carbon price seen by firms.

Target — What level of emissions reduction will be required and by when? For example, the annual allowance budget in California will be calculated to put the state on a path to meeting its target to cut emissions to levels, and target to cut emissions to 40 percent below levels.

Allowance Allocation — How will allowances be distributed? Governments can auction allowances, give them away for free to covered facilities, or some combination of the two. Auctioning generates revenue that can be used for climate or other purposes.

Both banking and borrowing help avoid price spikes. Borrowing, however, can create supply constraints in future years. Most programs allow banking but not borrowing. Compliance Periods — Must facilities surrender allowances every year or only every few years? Multi-year compliance periods can reduce price volatility. RGGI and California both use three-year compliance periods with partial annual surrender obligations. Offsets — Can companies use verified emissions reductions generated outside the cap to comply?

Offsets can lower the overall costs of meeting the cap. For instance, agricultural and forestry projects can often reduce emissions at lower cost than industrial facilities.