Cap and trade

It’s been a crazy week, so when I sat down to write tonight I had no idea what my topic would be. Luckily, I procrastinated (I mean… researched) by reading a couple of posts arduous wrote recently. The first is a short description of why cap and trade systems aren’t a good solution to global warming. The other is a longer discussion that came out of the comments on the first article.

The gist of it is that arduous doesn’t like cap & trade. I do (and not just because it sounds like the dread pirate Cap’n Trade), so I thought I’d run through and see where we differ.

For those who aren’t aware, a cap and trade system is designed to produce an economic incentive to reduce pollution. In this case, we’re talking specifically about CO2, which is covered by the Kyoto Protocol, but it could be anything. The government steps in and sets a limit (the “cap”) on production of CO2. To produce CO2, you have to buy an equivalent amount of credits, either from the government or from other businesses. If your production of pollution increases, you’ll have to buy more credits. On the other hand, if your production decreases, you can sell your extra credits (and there’s the “trade”). Over time, credits drop out of the system. Either the government just doesn’t produce as much or non-profits buy and retire credits. This drives the price up and makes it more expensive to pollute, so companies find cheap ways to reduce pollution.

That’s the theory, anyway. Not everyone thinks that’s how it plays out in the real world. Arduous is one, obviously, but she’s not alone. The major criticisms I see of cap & trade are either about how the system fails to work in practice or how it is a fundamentally flawed approach.

The practical criticisms are easier to answer, since they can be fixed by adjusting the particulars of the cap & trade system. For example, arduous repeats an argument from Kevin Anderson of the Tyndall Centre. In this view, when a company in the EU needs to get carbon credits, it buys clean energy to replace a dirty generator in a town in India (so far, so good). But then, that town sells its generator to a different city, which starts producing just as much pollution. Net effect: zero.

But wait! Sure, the net effect on carbon emissions is zero, but there are some interesting secondary effects. For one thing, we now have two towns in India with electricity with no increase in pollution, which means that pollution per unit energy is down. That’s not a big deal unless you think that India’s demand for energy is going to increase. In that case, we haven’t produced demand (since it was there anyway), we just managed to keep our second town from buying a new dirty generator. That sounds pretty good. An even better secondary effect is that these solar panels were paid for by a polluting company. This makes pollution expensive! If every time you pollute, you have to pay for someone else’s solar panels, you’ll try your best to  pollute less.

Maggie has also pointed out to me that this has a third side effect of increasing demand for renewable energy sources. This investment in clean technology can be even more direct in cap & trade schemes where you buy your credits from the government. For example, the Regional Greenhouse Gas Initiative has raised over $70 million by auctioning off carbon credits. All of this money goes to fund technologies that reduce greenhouse gases. If you’re interested in cap & trade, you’ll definitely want to look at the RGGI. They only started auctioning off credits a year ago, so it’s too soon to tell if they’ve been successful. Their third action is this month, so keep an eye on it!

The other big argument against cap & trade is ideological. In this view, we’re going about carbon reduction all backwards. Instead of using economic incentives to create social change, we should create social change and the economic incentives will follow.

As an optimist, my main response to that is, “let’s do both!” Even assuming that they’re exclusive, I still think that cap & trade may be the way to go. We’ve had some success with cap & trade systems in the past. The Clear Air Act set up a cap & trade system that got rid of the acid rain problem quickly and cheaply. Greenhouse gases are harder because it’s a more abstract problem (“global temperatures might increase” vs “you can’t go outside today”), but the principle is the same.

To me, the great thing about creating an economic incentive to reduce pollution is that it makes obvious the costs already in the system. As arduous says in her second post, people understand when it affects their checkbook directly. Unfortunately, as my mom wrote to me in an email recently, it’s really hard to figure out what the overall effects of your choices are. There are even people who argue that solar panels are worse for the environment than a coal power plant because of the environmental cost of mining and producing its components!

With a cap & trade system, something with zero measured value (our current climate) is given a value that will start to show up in all products. If my shoe plant produces twice as much carbon as yours, then my shoes are going to cost more because I’ll have to pay you for some carbon offsets. Suddenly, consumers can see in a direct way (price) how much something is going to affect the environment. Even better, the most environmental thing you can do in that case is also the cheapest!

Okay, this is still reasonably abstract. Maybe it’s even too abstract for most people. Maybe people will just be mad that their favorite brand of sneakers suddenly cost $5 more a pair. Unfortunately, I don’t think those people are reachable. They value their SUV more than they value the lowlands in Bangladesh. Local, organic bananas might taste better than those from halfway across the world, but they’d rather have a Big Mac anyway.

I don’t think we can afford to wait on this until we can convince those people that they really should care about Bangladesh and local food. Instead, we need to make our environmental costs into their economic costs. Then they can help the environment doing what they like best: buying stuff for cheap. this!

2 Responses so far »

  1. 1

    Luci said,

    March 5, 2009 @ 2:23 am

    I think that this is a great and timely entry, but (and I mean this in the nicest way possible) it definitely could have used a second read-through before posting. The typos automatically lend it less credibility, which I am very sure is not what you want! Regardless, I thought you made some great points, especially about how the system could lead to a rise in the prices of consumer products. Hey, maybe it will even have the added benefit of consumers purchasing less stuff they don’t need, thereby helping to limit the amount of garbage produced annually. Guess I’m an idealist, too. 🙂

  2. 2

    Will said,

    March 5, 2009 @ 10:27 am

    Thanks for the comments, Luci! I usually like to do a second reading and get Maggie to proof me as well, but I was in a rush last night. I was also apparently half-asleep, since there were a BUNCH of typos. I just went through and fixed them, but I apologize for letting them through in the first place.

    On my read-through, I also noticed that the article sounds pretty elitist at the end. It’s really not. All of us have some of that person in us. The one who prefers convenience to responsibility and who doesn’t have time to figure everything out. We all have our domains where that aspect of ourselves is paramount. For me, one of those areas is cars. I’d rather just have one and go to the mechanic occasionally. For other people, that’s global warming.

    The best part of cap and trade, if it works, is that it makes it easier for that aspect of us to get the message.

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