Cap and Trade: Successes and Limitations
Written by Brandon Croarkin, GEI Associate
Developed in the late 1960’s by a Wisconsin graduate student named Thomas Crocker, the cap and trade market is a method devised in order to curb emissions of pollutants. Today, it is constantly being pitched as a way to tackle the issue of climate change. This has led to a wide range of remarks from across the political spectrum. However, before addressing the politics of the issue, it is necessary to explore what cap and trade is and whether it is a feasible option to take on climate change.
Cap and trade puts a limit on the number and amount of pollutants that firms within an industry are allowed to emit. This cap is determined by measuring the costs of a pollutant and weighing this against the benefits of said pollutant (benefits would involve the electricity that is associated with the burning of coal and subsequent CO2 which would be assessed as a cost). The right to pollute is then distributed through permits, which are traded between firms according to how costly it is for them to abate their pollution. Additionally, high penalties are handed to firms that emit above the amount dictated by their permits in order to ensure compliance. The logic behind this is that the firms that can reduce emissions more efficiently will sell their permits to firms that face higher costs to curbing emissions. Consequently, the industry is able to reduce their emissions in the most cost-efficient manner.
This has been most famously enacted through the Acid Rain Program in 1990. Using the cap and trade approach, the program set a cap on the amount of sulfur dioxide (SO2) and nitric oxides (NOx) that may be emitted at 110 most coal-burning electric power plants in 21 eastern and midwestern states. It produced remarkable results. In 2002, SO2 emissions were 41% lower than 1980 (the benchmark year upon which they set their targets). A study in 2003 by the Office of Management and Budget (OMB) found that the Acid Rain Program accounted for a human health benefit of over $70 billion annually.
If this is an accurate number then why isn’t cap and trade more implemented today to combat climate change?
While there are many political impediments to implementing cap and trade, there are also many technical problems with applying cap and trade to climate change.
When the Acid Rain Program was implemented in 1990 it dealt solely with electric power plants in 21 states and their emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx). The problem with enacting similar programs on carbon emission in order to stop climate change is that climate change is a vastly broader issue. Cap and trade is better suited for discrete, local pollution problems, such as acid rain. There are various markets that emit carbon dioxide (CO2). The combustion of fossil fuels to generate electricity is largest single source of CO2 emissions but it only accounts for 38% of the total U.S. CO2 emissions, with transportation, manufacturing industry, residential and commercial real estate heating and cooling, plus some other sources responsible for the other 62%.
Figure1. U.S. Carbon Dioxide Emission, by source
Realistically, cap and trade markets would only have the power to regulate 52% of carbon emissions (electricity and industry), hardly enough to make an impact especially when considering that climate change occurs on a global scale. Furthermore, this would still involve very high administrative costs in order to set up and high costs down the line from regulating.
Despite it being a great economic solution on paper, in reality a cap and trade program doesn’t seem to be the most efficient route to take to tackle climate change. I believe that we could more efficiently tackle climate change through emissions taxes and investment into renewable energy sources.