Image courtesy of Dave Burnham via Flickr.
When you hear politicians talking about cap-and-trade, you should know that it has nothing to do with swapping hats, and everything to do with controlling greenhouse emissions.
Already adopted in some fashion by about ten countries or regions, cap and trade (pdf) in theory is able to provide the public sector with the flexibility to reduce emissions, while also stimulating economic growth and rewarding innovation.
Is it a win-win? Many economists and environmentalists seem to think so, but others, including the UN, have their doubts. Here’s how it works, and where it could take us.
First things first: What is cap-and-trade?
According to the Environmental Defense Fund, cap-and-trade is an “environmentally and economically sensible approach to controlling greenhouse gas emissions,” which sets a limit on pollution and lets companies buy and sell the permission to do so.
The idea emerged in the 1970s and 1980s, when environmentalists and free-market conservatives became unlikely bedfellows regarding an idea that would let people buy and sell the right to pollute.
The concept was adopted to phase out lead in gasoline and during the Reagan administration, and combat power plant-induced acid rain under Bush Sr, both of which succeeded. Now cap-and-trade is being put in action across the world to mitigate greenhouse gases.
How does it work?
The CAP portion refers to a limit that is set on emissions, typically by governments, in order to reduce pollutants released into the atmosphere.
The TRADE portion, on the other hand, creates a market where companies can buy and sell carbon allowances among each other, providing economic incentive for polluting less.
Under this system, companies are assigned a pollution quota. If they pollute less than the quota, they can trade carbon allowances that can be sold to other companies. In the same way, companies that pollute more than their quota must buy credits from another company in the network. It’s often more profitable for big pollutants to decrease their emissions than to buy allowances — which is exactly the point.
The main idea is that no matter how aggressively individual companies choose or are able to decrease emissions, due to the cap, the same amount of pollution cuts are achieved overall.
Who uses it?
There are a handful of cap-and-trade systems currently in place worldwide. These include, but are not limited to:
EU: The first to tackle carbon emissions specifically was the European Union Emission Trading Scheme, which includes 28 member nations, and is in phase three of three. By 2020, it aims to reduce emissions by 21 percent since its launch in 2005.
South Korea: As part of South Korea’s goal to reduce its emissions by 30 percent by 2020, the country launched what is now the second largest cap-and-trade system, after the EU.
China: China is planning what will likely be the world’s largest cap-and-trade market as early as 2016. There are already seven pilot programs in cities throughout the nation, which is the world’s top polluter at present.
Japan: In 2010, a cap-and-trade program was launched in Tokyo, Japan — the first urban program of its kind. As of 2012, the program reduced emissions by 23 percent.
U.S: In America, California launched its own cap-and-trade program in 2013, which is set to account for 85 percent of the state’s emissions by 2015, and reduce emissions from regulated entities by over 16 percent by 2020.
There is also the Regional Greenhouse Gas Initiative (RGGI), a cap and trade initiative of nine Northeastern states covering the electric-power sector.
What’s the downside?
As is the case with most climate-related policy, not everyone is aboard the cap-and-trade train. In this case, criticisms come not just from climate skeptics, but politicians, environmentalists, and even the UN.
Journalists have documented unjust advantages granted to major pollutants in the form of free allowances, and have called the policy a distraction from other solutions in which players are sometimes inclined to cheat.
The EU’s struggle to make their own program work has also shed shadows of doubt on its efficacy, especially coupled with its already troubled economy.
The UN’s IPCC noted in a 2010 report that “Their short-run environmental effect has been limited.” The IPCC has made similar complaints of the U.S.’ RGGI.
Some conservative thinkers in the U.S. also dismiss cap-and-trade as a political agenda, in spite of its origination under Republican leadership.
It’s commonly accepted that the current rate of emissions needs to be cut drastically if the world is to meet the warming limit agreed upon by UN states.
Since we are still in the relatively early years of greenhouse gas cap-and-trade, we can expect that as existing programs evolve and new ones are put into action, tighter caps and higher priced allowances will, in time, yield more effective results.
But since greenhouse gases are difficult to quantify, and much of the cap-and-trade’s success rides on the whims and conviction of politicians, it may take more than just a cap to seal the deal.