The goal: To steadily reduce carbon dioxide and other greenhouse gas emissions economy-wide in a cost-effective manner.
The cap: Each large-scale emitter, or company, will have a limit on the amount of greenhouse gas that it can emit. The firm must have an “emissions permit” for every ton of carbon dioxide it releases into the atmosphere. These permits set an enforceable limit, or cap, on the amount of greenhouse gas pollution that the company is allowed to emit. Over time, the limits become stricter, allowing less and less pollution, until the ultimate reduction goal is met. This is similar to the cap and trade program enacted by the Clean Air Act of 1990, which reduced the sulfur emissions that cause acid rain, and it met the goals at a much lower cost than industry or government predicted.
The trade: It will be relatively cheaper or easier for some companies to reduce their emissions below their required limit than others. These more efficient companies, who emit less than their allowance, can sell their extra permits to companies that are not able to make reductions as easily. This creates a system that guarantees a set level of overall reductions, while rewarding the most efficient companies and ensuring that the cap can be met at the lowest possible cost to the economy.
The goal: To limit the rise in global temperature to approximately 2.0 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels by 2050 by reducing carbon dioxide and other emissions from companies as part of a larger plan for curbing global warming.
The cap: Each large-scale emitter, or company, will have a limit on the amount of greenhouse gas that it can emit. The firm must have an “emissions permit” for every ton of carbon dioxide it releases into the atmosphere. These permits set an enforceable limit, or cap, on the amount of greenhouse gas pollution that the company is allowed to emit. Over time, the limits become stricter, allowing less and less pollution, until the ultimate reduction goal is met. This is similar to the cap and trade program enacted by the Clean Air Act of 1990, which reduced the sulfur emissions that cause acid rain, and it met the goals at a much lower cost than industry or government predicted.
The trade: It will be relatively cheaper or easier for some companies to reduce their emissions below their required limit than others. These more efficient companies, who emit less than their allowance, can sell their extra permits to companies that are not able to make reductions as easily. This creates a system that guarantees a set level of overall reductions, while rewarding the most efficient companies and ensuring that the cap can be met at the lowest possible cost to the economy.
The goal: To limit the rise in global temperature to approximately 2.0 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels by 2050 by reducing carbon dioxide and other emissions from companies as part of a larger plan for curbing global warming.
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Benefits
On the plus side
"A cap provides certainty with regard to emissions," says William Chameides, dean of the Nicholas School of Earth and Ocean Sciences at Duke University. "You can put in a carbon tax and hope the market responds appropriately, but with a cap, whatever happens, that says not more than X tons will be emitted. A cap provides you with environmental certainty, which is very, very important."
"Market mechanism: A market can be a brilliant means for distributing goods at the lowest price, and proponents say cap-and-trade will seek the cheapest reductions in carbon dioxide emissions. An electric generator that switches to geothermal power could, for example, sell permits to another generator that remains reliant on coal, providing a market-based subsidy for the low-carbon source while penalizing the high-carbon source. If it proves more expensive to reduce carbon, the permit price rises, and likewise the subsidy for no-carbon electricity.
"Broad coverage: Planting a forest that removes carbon dioxide from the atmosphere is a step against global warming that could be rewarded by cap-and-trade, but not by a carbon tax. Cap-and-trade systems could enable forest owners to sell permits, thereby subsidizing a climate-friendly activity. The market could also encourage a company that invents a low-carbon electric-generator, which would be more valuable to its customers because they would, in turn, be able to sell more carbon permits. According to Chameides and co-author Michael Oppenheimer (Navigating Numbers, World Resources Institute), "... the advantage of a market-based system is that it provides an incentive for innovation -- which can translate into inexpensive CO2 emission reductions."
"Cost-saving: The successful acid-rain program shows the potential to reduce costs, Chameides says. "Virtually every air pollution regulation we have put into place has turned out to be much less expensive than original estimates. As long as we put in appropriate goals, there is a good possibility that innovation will reach it without costing as much."
"Profit motive: "With cap-and-trade, there is a pot of gold at the end of the rainbow," says Chameides. "If you can exceed the requirements, you can make a lot of money. I don't see the incentive being as strong with a carbon tax."
On the minus side
Verification: If I operate a supposedly low-carbon generating station, who will check that I am truthful about emissions, and not skimping on my permit purchase? "Because permits meant to be tradable, redeemable, and backed by the U.S. government, they will have to police the system, to make sure the reduction is valid," says Barrett. "Cap-and-trade can get unbelievably complicated because basically you have printed a new form of currency, and you have to create an entity to defend it."
Fudge factor: Many of the benefits of cap-and-trade emerge from the fact that permits can be traded, yet if businesses even slightly understate their emissions on permits that are sold and resold, the fudge factor can add up to sabotage the market.
The safety valve: Some popular cap-and-trade proposals place a ceiling on the price of pollution permits, but this could further undermine the program, adds Barrett. "Politicians say, 'Let's create a safety valve so cap-and-trade does not go haywire.'" That may sound reasonable, but if prices reach the ceiling, the government could dump permits on the market, and "then you lose the benefit of a hard cap on emissions. If you sell all permits at the limit, economically, it's almost identical to a carbon tax."
Market manipulation: The very market that is supposed to bring benefits under cap-and-trade raises further caution flags, says Barrett. "One reason that California environmentalists opposed cap-and-trade comes from the whole Enron disaster and deregulation. We found that energy traders are technically and morally capable of doing terrible things." Even Chameides concedes cap-and-trade could turn sour: "It's really clear from the Wall Street meltdown that markets can go really bad. You have to be really careful that cap-and-trade is set up to avoid unnecessary speculation. We don't want to end up having this be a place to make money by saving 'paper carbon.'"
Birthing blues: To start cap-and-trade, the permits must be distributed fairly, or at least logically. Even at a "modest" $15 per ton of carbon, the system would be handling $80 to $85 billion today, "about 10 times larger than value of the permits in the sulfur dioxide program," says economics professor Gilbert Metcalf of Tufts University. "Who gets those permits? Do we give them to the energy sector, the energy-intensive industry sector... or to state and local governments?" Although this decision could spark massive meddling from interest groups and businesses, a second method, much preferred by economists, is gaining popularity. According to Jennifer Morris, a research assistant in the MIT Joint Program on the Science and Policy of Global Change, and an author of a recent analysis of greenhouse gas proposals, "We have seen a political shift toward auctions" in recent U.S. proposals. "In Europe, they gave permits away in the first phase of [the cap-and-trade system], but are moving to auctions now."
Fairness: A lot of money is at stake. Recently, the EPA estimated the cost of a particular cap-and-trade system between 2012 and 2050 at between $5 to $10 trillion. "If the government gave that away [by allocating free permits to existing polluters], it would be the largest transfer of wealth to the private sector since the Oklahoma land rush" of 1893, Barrett says. While revenue from carbon taxes can offset other taxes, in cap-and-trade, the money may stay with the businesses and speculators in the carbon market.
"A cap provides certainty with regard to emissions," says William Chameides, dean of the Nicholas School of Earth and Ocean Sciences at Duke University. "You can put in a carbon tax and hope the market responds appropriately, but with a cap, whatever happens, that says not more than X tons will be emitted. A cap provides you with environmental certainty, which is very, very important."
"Market mechanism: A market can be a brilliant means for distributing goods at the lowest price, and proponents say cap-and-trade will seek the cheapest reductions in carbon dioxide emissions. An electric generator that switches to geothermal power could, for example, sell permits to another generator that remains reliant on coal, providing a market-based subsidy for the low-carbon source while penalizing the high-carbon source. If it proves more expensive to reduce carbon, the permit price rises, and likewise the subsidy for no-carbon electricity.
"Broad coverage: Planting a forest that removes carbon dioxide from the atmosphere is a step against global warming that could be rewarded by cap-and-trade, but not by a carbon tax. Cap-and-trade systems could enable forest owners to sell permits, thereby subsidizing a climate-friendly activity. The market could also encourage a company that invents a low-carbon electric-generator, which would be more valuable to its customers because they would, in turn, be able to sell more carbon permits. According to Chameides and co-author Michael Oppenheimer (Navigating Numbers, World Resources Institute), "... the advantage of a market-based system is that it provides an incentive for innovation -- which can translate into inexpensive CO2 emission reductions."
"Cost-saving: The successful acid-rain program shows the potential to reduce costs, Chameides says. "Virtually every air pollution regulation we have put into place has turned out to be much less expensive than original estimates. As long as we put in appropriate goals, there is a good possibility that innovation will reach it without costing as much."
"Profit motive: "With cap-and-trade, there is a pot of gold at the end of the rainbow," says Chameides. "If you can exceed the requirements, you can make a lot of money. I don't see the incentive being as strong with a carbon tax."
On the minus side
Verification: If I operate a supposedly low-carbon generating station, who will check that I am truthful about emissions, and not skimping on my permit purchase? "Because permits meant to be tradable, redeemable, and backed by the U.S. government, they will have to police the system, to make sure the reduction is valid," says Barrett. "Cap-and-trade can get unbelievably complicated because basically you have printed a new form of currency, and you have to create an entity to defend it."
Fudge factor: Many of the benefits of cap-and-trade emerge from the fact that permits can be traded, yet if businesses even slightly understate their emissions on permits that are sold and resold, the fudge factor can add up to sabotage the market.
The safety valve: Some popular cap-and-trade proposals place a ceiling on the price of pollution permits, but this could further undermine the program, adds Barrett. "Politicians say, 'Let's create a safety valve so cap-and-trade does not go haywire.'" That may sound reasonable, but if prices reach the ceiling, the government could dump permits on the market, and "then you lose the benefit of a hard cap on emissions. If you sell all permits at the limit, economically, it's almost identical to a carbon tax."
Market manipulation: The very market that is supposed to bring benefits under cap-and-trade raises further caution flags, says Barrett. "One reason that California environmentalists opposed cap-and-trade comes from the whole Enron disaster and deregulation. We found that energy traders are technically and morally capable of doing terrible things." Even Chameides concedes cap-and-trade could turn sour: "It's really clear from the Wall Street meltdown that markets can go really bad. You have to be really careful that cap-and-trade is set up to avoid unnecessary speculation. We don't want to end up having this be a place to make money by saving 'paper carbon.'"
Birthing blues: To start cap-and-trade, the permits must be distributed fairly, or at least logically. Even at a "modest" $15 per ton of carbon, the system would be handling $80 to $85 billion today, "about 10 times larger than value of the permits in the sulfur dioxide program," says economics professor Gilbert Metcalf of Tufts University. "Who gets those permits? Do we give them to the energy sector, the energy-intensive industry sector... or to state and local governments?" Although this decision could spark massive meddling from interest groups and businesses, a second method, much preferred by economists, is gaining popularity. According to Jennifer Morris, a research assistant in the MIT Joint Program on the Science and Policy of Global Change, and an author of a recent analysis of greenhouse gas proposals, "We have seen a political shift toward auctions" in recent U.S. proposals. "In Europe, they gave permits away in the first phase of [the cap-and-trade system], but are moving to auctions now."
Fairness: A lot of money is at stake. Recently, the EPA estimated the cost of a particular cap-and-trade system between 2012 and 2050 at between $5 to $10 trillion. "If the government gave that away [by allocating free permits to existing polluters], it would be the largest transfer of wealth to the private sector since the Oklahoma land rush" of 1893, Barrett says. While revenue from carbon taxes can offset other taxes, in cap-and-trade, the money may stay with the businesses and speculators in the carbon market.
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