Some proponents of these programs proclaim that they are flexible, market-based mechanisms, however, others say that the experience of European countries which launched these programs in 2005, does not support this view. According to a report by the Fraser Institute in Canada, "Europe adopted cap and trade in 2005 and the results were far from stellar, according to a variety of reports. The Washington Post, for example, described it as 'a bureaucratic morass with a host of unexpected and costly side effects and a much smaller effect on carbon emissions than planned.'”
How Cap-and-Trade Works
For cap-and-trade programs, governments set an overall limit (cap) on emissions. Based on this cap, quotas are imposed on companies that are sources of emissions, such as utilities, manufacturing operations, and other CO2-emitting facilities. Allowances are issued to each facility that represent the volume of their quota, and each facility must either reduce emissions to meet the quota or purchase allowances from those that have exceeded their required reductions. This is the ‘trade’ component of cap-and-trade.
While cap-and-trade does not have the harsher implications of ‘CO2 rationing’ or the implied financial penalties of ‘carbon taxes’, this regulatory regime has elements of both. It stems from the creation of a scarcity by government dictate, that is, the cap on CO2 emissions, and the rationing of remaining supply through quotas imposed by governments. The expected result is that the cost of compliance will reduce the use of carbon fuels.
One of the major problems with this concept is that the levels at which the cap and the quotas are set are arbitrary, and no one really knows the amount of emissions that would make a difference in global temperatures, making the correction to climate change - the original intent of the cap-and-trade concept - virtually impossible to determine.
A Political Gambit and Economic Hardship
For this reason, cap-and-trade has become a political gambit, not a market mechanism which can contribute in a meaningful, defined way to the reduction of CO2 emissions, and contribute to managing climate change. The possibility of the emergence of a black market in carbon allowances is currently under investigation.
The regulators who will control cap-and-trade have two dilemmas; they will either err on the side of low caps, wherein significant reductions in emissions will be required, resulting in a costlier program, or they will err on the side of higher caps, resulting in smaller emission reductions and wasted resources, since the cost of emission reductions would be greater than the benefit - perhaps no benefit at all.
Positive Benefit of Pollution Abatement Programs
One of the benefits of any cap-and-trade program, for pollutants such as CO2, nitrous oxide or sulfur dioxide emissions, is that these programs do not require governments to choose where emission reductions will be made. They allow the market to encourage the lowest-cost solutions, and allow firms with cheaper emission abatement possibilities to sell allowances to firms with higher abatement costs. Proponents of cap-and-trade programs expect that this market-based incentive will stimulate organizations to adopt them, resulting in a positive impact on the economy.
Failure to make those adjustments and to encourage other countries to do the same, note cap-and-trade proponents, means that it is likely there will be a much larger cost associated with adverse climate change impacts, scarcities of water, impaired agricultural yields, public health effects, damage to ecosystems, and greater flooding and storm damage.
Costly Technology
Emission control technology will be costly and the cost will undoubtedly be passed on to the consumer. However, there is no product or service provided to the consumer in return, nor are the emission reductions likely to produce any tangible benefit. Consequently, cap-and-trade energy management programs represent a serious burden on both businesses and consumers, and will fail to achieve the anticipated objectives of lowering CO2 emissions.
Sources:
Martin Feldstein, "Cap-and-Trade: All Cost, No Benefit," The Washington Post, June 1, 2009
Diane Katz , Director of Risk, Environment, and Energy Policy Studies, The Fraser Institute, "Costly consequences: Cap-and-trade is not a market-based solution." July, 2009
Referred to in the Fraser Institute report:
Mufson, Steven (2007, April 9). Europe’s Problems Color US Plans to Curb Carbon Gases. The Washington Post. A1.
Duane Sharp - I am a retired professional engineer (electronics), with over 40 years of writing experience in technology topics, with a focus on the IT ...
