Cap and Trade
© Richard Grossman MD, 2009
Economics is one of my weak points, so I write about this subject with trepidation. Since “cap and trade” has become an important concept to limit emissions that lead to global climate change, I need to try to understand it.
Not all people agree that greenhouse gases (mainly emitted from our use of fossil fuels) are responsible for climate change. Nor do all people even agree that the climate is warming. However, most scientists have reached agreement that human activities are causing major alterations in the world’s climate. Furthermore, many governments have recognized the hazards of global climate change, and are taking steps to control it. Until we know with certainty what is causing climate change, it is certainly prudent to take precautions to slow the onset of this disaster.
C&T is one of the proposed methods using the free market system to make it unprofitable to emit large quantities of greenhouse gases. The concept was first tested on an international basis with a different type of harmful emissions—those that destroy the ozone layer. The successful Montreal Protocol, signed 20 years ago, gradually forced industry to decrease its production of chloroflurocarbons. Remember, these CFCs were used in aerosol cans and refrigerators, but they have now been replaced by less harmful substitutes.
On a smaller scale, C&T has controlled acid rain in the USA. In this case, the system has been very successful in limiting release of sulfur dioxide, the precursor of acid rain. Since most sulfur dioxide comes from electrical generation with coal, power plants have been forced to install scrubbers that remove this hazardous gas or take other measures such as burning low sulfur coal. As a result, lakes and streams are healthier, fewer trees die—and house paint lasts longer!
To control greenhouse gas emissions using C&T, the first step is to establish current levels of emissions of these gases. Carbon dioxide (CO2) is the most important greenhouse gas since it is emitted in such massive amounts. Estimating CO2 output can be done by inference. For instance, combustion of a ton of coal produces almost three tons of CO2, and one gallon of gasoline generates almost twenty pounds of this greenhouse gas. A well-run company keeps close track of its use of fuel, so its CO2 output is easy to compute.
Many of the top corporations are already inventorying their emissions because they foresee that C&T will become law soon. The current level of CO2 will then become the cap—the maximum that the company can emit. If it exceeds that level, it will have to pay a fine.
The next step is to trade the authority to emit greenhouse gases. If one company can somehow reduce its CO2 emissions by, say, 100 tons below its cap, then it can sell the right to emit that amount to another company.
To lower emissions, this cap is reduced over time at a predetermined rate. For instance, the Montreal Protocol was successful because it cut the use of CFCs in 1994 to just one quarter of the baseline production of these harmful chemicals.
Already there is a market for buying and selling CO2 emissions. The largest market is the European Climate Exchange, where a metric tonne of CO2 emissions is currently worth about 12.5 Euros. The value will increase as time goes on and the cap is lowered.
How can a power company lower its CO2 output? Green power is one of the best ways. Electricity from the sun, hydroelectric or wind emits no CO2!
Would C&T work for limiting human population growth? Many years ago the great anthropologist Margaret Mead suggested that people should be required to meet certain requirements before they could start a family; presumably this would include education about raising children. She proposed that governments issue licenses for childbearing.
Instead of licensing people to be parents, another way to limit fertility would be to cap and trade. So far this method has not been adopted by any government—nor would I recommend it. Making voluntary family planning available has proven to be more effective than coercive programs, without the risk of backlash.
Cap and trade consists simply of placing a limit on harmful emissions, gradually lowering that cap, and having the ability to buy and sell the right to emit pollution. This system has been proven to be an effective way to decrease pollution. Hopefully C&T will work for greenhouse gases, but will never be used for the right to bear children.
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