Cap and Trade: A Practical Solution to a Pressing Problem

Last fall, the United States and 194 other countries inked a historic climate accord. The Paris Agreement, as it is called, aims to prevent global temperatures from rising two degrees Celsius above preindustrial levels. Signatories can ratify the agreement starting this month, and the provisions take effect in 2020. Climate scientists generally agree that keeping the global rise in temperatures below the two degree threshold will mitigate permanent damage to the global ecosystem and minimize the effects of climate change on the sea level, sparing some of the world’s most populous cities from rising oceans. There is consensus among climate scientists that the world will change significantly and rapidly if we do not act now to alter the course of climate change.

The potential costs of climate change are staggering, and immediate action is needed to minimize these future costs to society. Climate change is making weather more erratic and extreme. More frequent and potent storms such as hurricanes, tornadoes and typhoons will cause billions of dollars in damage. Additionally, rising sea levels increase the risk of coastal flooding, threatening major coastal cities around the world such as New York, Calcutta, Amsterdam, and Tokyo. Climate change also poses a serious threat to agriculture; changing weather patters can create severe droughts, threating regional food supplies. Furthermore, the more erratic weather patterns will make year-to-year harvests inconsistent, putting additional stress on the world food supply. This will be especially burdensome for poor and developing nations that do not have the resources to support their populations in the event of agricultural crises.

Although the Paris Agreement lacks a binding enforcement mechanism, it is an important step forward in the fight against climate change. It is an opportunity for the world to work together to stop the common threat that climate change poses to all of the inhabitants of planet Earth, especially those in the developing world who are feeling the effects of the rapidly changing climate but lack the resources to protect themselves from its effects. The United States needs to set an example for the rest of the world and take leadership on the climate issue. The United States has the most advanced economy in the world and is the world’s second largest greenhouse gas producer, behind China—it has a responsibility to reduce its emissions to ensure the future prospects of both its citizens and the citizens of the rest of the world.

The Paris Agreement is not the first treaty countries have created with the purpose of combating greenhouse gas (GHG) emissions and climate change. The Kyoto Protocol, which was adopted in 1997, recognized that climate change was caused by man-made pollution, and set forward targets to reduce GHG emissions. Although 192 countries were parties to the treaty, only 52 nations (the bulk of which are in the European Union) adopted binding emissions-reduction targets. Some of the worlds largest polluters, including the United Sates, China, and India declined to sign the Kyoto Protocol, greatly reducing its efficacy. The Paris Agreement is a second chance for the world community to work together to save our planet.

The Paris Agreement presents a great opportunity for the U.S. to show the world that it is willing to lead by example on this issue. This requires that the United States take bold action to reduce its greenhouse gas emissions, and give the rest of the world a model to follow. Due to the upcoming election, it is unlikely that any major legislation on this issue will make it through Congress this year, so this task will fall to our next President. Whoever we elect this November should make major climate policy reform a top priority for his or her first year in office. Fortunately, solutions exist that will allow the United States to achieve these goals.

The most effective way to reduce carbon dioxide and other greenhouse gas emissions is to put a price on pollution. Pollution, in this case GHG emissions, is an example of what economists call a negative externality, the unintended consequence of producing and using goods and services. Greenhouse gases increase the Earth’s temperature by trapping more solar radiation in the atmosphere, which is detrimental to society. Producers do not take these societal costs into account, so they produce more pollution than is socially optimal. The way to solve the negative externality problem is to force producers to internalize these costs when they decide to make goods and services, in this case with some form of a tax or price on greenhouse gas emissions.

Although a simple tax on carbon dioxide emissions would be one possible way for the United States to reduce its GHG emissions, it is not the only way to achieve this objective. A “cap and trade” system is a more dynamic and flexible mechanism to achieve the same results.

Cap and trade uses a market mechanism to allow greenhouse gas emitters to effectively trade the rights to pollute. The government sets a hard cap on the total level of emissions, then allocates the right to pollute to different producers in sectors such as energy and manufacturing. This is usually done proportionally to the amount of GHG emitted by each producer that participates in the system. Producers can then trade their right to pollute, and market forces set the price of pollution. This incentivizes producers with lower costs of controlling emissions to cut the amount they pollute and sell the excess rights to pollute to those producers with higher costs of controlling emissions. The ability to profit by selling the right to pollute incentivizes the private sector to invest in the development of low-carbon technologies and alternative energy sources.

A cap and trade system allows the government greater control over the size and timing of reducing GHG emissions. This is compared to a carbon tax system, where the level of emissions is indirectly controlled by changing the tax rate. In a cap and trade system, government regulators can gradually lower the cap on emissions over the entire country, ensuring that the United States would meet its goals for reducing greenhouse gas emissions. However, strict monitoring coupled with heavy fines for exceeding the cap are necessary to ensure that businesses comply with the requirements.

Cap and trade systems have already been successfully implemented around the world. The European Union introduced the Emissions Trading System (ETS) to meet its GHG reduction requirements from the Kyoto Protocol. By 2020, emissions from industries regulated by the ETS will be 21 percent lower compared to 2005 levels. These impressive reductions in GHG emissions are achieved at minimal cost, with some estimates pegging the cost of the ETS to the European Union at 0.01 percent of GDP.

Closer to home, California has implemented a cap and trade system to meet its legislative requirement to reduce greenhouse gas emissions to 1990 levels by 2020. This amounts to a greater than 15 percent reduction in emissions from 2015 levels in a five-year period. California’s cap and trade system is one component in a progressive energy policy that also includes energy efficiency regulations, fuel efficiency standards, and the promotion of renewable energy sources. Although the United States uses a system similar to this to regulate nitrogen oxide, it should expand the program to other pollutants such as carbon dioxide and methane. The federal government should seek to emulate the other elements of California’s climate policy as well as its cap and trade system to create a comprehensive, nationwide strategy for reducing emissions. T

he main argument against cap and trade, and taxing emissions in general, is the economic cost of these policies. Many opponents of climate regulation claim that the harm done to the economy by regulating the emission of greenhouse gases outweighs the benefits to the environment, but the emissions trading scheme provides a resounding refutation of this claim. Substantial reductions in GHG emissions can be achieved at small cost to today’s economy, leaving future generations with a more habitable earth. The benefits of a cap and trade system for the environment, both now and into the future, far outweigh the costs they impose on producers.

A cap and trade system is the best way for the United States to reduce its greenhouse gas emissions and do its part to comply with the provisions of the Paris Agreement.. Cap and trade systems are dynamic; they encourage the lowest cost solution to reducing GHG emissions. Cap and trade systems are also flexible, allowing regulators t0 easily target the exact level of emissions they want to limit. The combination of these two attractive features makes cap and trade the best system to reduce greenhouse gas emissions and limit the effects of climate change on our shared planet.

Michael Fogarty

Michael Fogarty '19 studies in the College of Arts & Sciences. He can be reached at michael.fogarty@wustl.edu.

2 thoughts on “Cap and Trade: A Practical Solution to a Pressing Problem

  • 23 December 2016 at 11:45 AM
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    Sorry, cap and trade is NOT the best way. It’s an ineffective way. A much much simpler superior law would place an annually increasing revenue neutral fee. California’s cap and trade has worked OK, but it is a complicated messy system. So much so that the state itself, in its resolution AJR-043, has called on congress to specifically adopt CFD. Visit citizen climate lobby’s website. Don’t get me wrong, I live in California and am proud of the overall stand they’ve taken on addressing climate change. JB is a hero of mine.

    Reply
    • 23 December 2016 at 11:47 AM
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      By CFD I mean Carbon Fee and dividend. The dividend is what makes it revenue neutral. Instead of congress spending the money (under the influence of special interests), the money is spread evenly to all citizens as a dividend.

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