Cap and Trade
The best option among flawed choices?
by Erin Noble
There’s a new buzz around Eugene these days, centering on a three-word phrase many have only recently added to their lexicon: cap and trade. Europe has done it, Peter DeFazio doesn’t like it and Congress is mulling it over as we speak. So what is it, and why aren’t we already doing it? Well …
There are two components to a cap and trade system: The “cap” sets a limit on carbon emissions by distributing a finite number of carbon credits, which allow large companies to emit CO2 into the atmosphere. The “trade” sets up a framework by which companies affected by the “cap” can buy and sell carbon credits. One result of this system is that companies with expensive costs of carbon dioxide reduction can purchase credits from companies able to reduce emissions inexpensively.
The ability to trade credits makes carbon reduction more efficient. Imagine two manufacturing companies: Carbon Creators and Green Guys. Carbon Creators is unimaginative about streamlining its production line and must invest $20 to produce one less ton of carbon. Green Guys is more climate-innovative and can produce one less ton of carbon for only $10. The two strike a deal, and Carbon Creators purchases 1-ton carbon credits from Green Guys for $15 each. Thus, Green Guys is rewarded for its innovation by earning $5 for each ton of carbon reduced from the production process. Meanwhile, the financial burden on Carbon Creators (and therefore its customers) is also reduced because the company is paying $5 less per ton of carbon that it emits.
Some don’t see cap and trade as such a rosy picture — and they’re right! The real world has a tendency of mucking up economic models. Yet no system is perfect, and I contend that cap and trade is the best of our flawed policy tools. Cap and trade provides for the efficient reduction of carbon dioxide, although not as seamlessly as the simple Carbon Creator/Green Guy model would suggest. Cap and trade allows regulators to place a concrete limit on emissions. And cap and trade is politically viable. We’ve actually used it to effectively clean up acid rain in the Eastern U.S.
Democratic Rep. Peter DeFazio has been particularly vocal against a cap-and-trade system. He complains that “Washington, D.C., would give a large portion of the pollution credits to the energy industry based on historical emission levels free of charge.” But DeFazio fails to mention that our current system allows the energy industry to pollute without charge and without limit.
DeFazio seems to be holding out for a federal bill that either taxes carbon production or directly regulates emissions by company. But taxing carbon fails to provide a concrete goal: How many tons of carbon would be reduced under a $1/ton tax? Nobody has a clue! Regulating emissions by individual company is a recipe for disaster: Think high cost of regulation and unnecessary government interference, not to mention a wide new lobbying frontier. I suspect that large corporations with lobbyist payrolls and government ties will get the better end of that deal.
More importantly, the political will does not exist to pass either through Congress.
Al Gore recently voiced his strong support for the Waxman-Markey Bill, an exciting new piece of cap-and-trade legislation currently working its way through Congress. Originally a skeptic of cap and trade, Gore seems to have come to a simple resolution: Let’s try something, anything. For that he gets my standing ovation.
The Waxman-Markey Bill now faces some serious questions: How do lawmakers apportion credits to industry? How do we prevent credit market manipulation? What about the numerous pitfalls experienced by the European system? These are valid objections brought by both Gore and DeFazio, taken primarily from observations of the European cap-and-trade model. But I much prefer Gore’s skeptical cooperation to DeFazio’s road-blocking. Let’s view Europe’s example as a prime opportunity to bypass mistakes. Let’s become a leader on climate change action, rather than a laggard.
Erin Noble is an economics graduate of Pomona College and the New Business Director of West Wind Forest Products, Inc. in Eugene.