Cap and Trade: What is your view?

I had the opportunity to read the International Emissions Trading Association’s (IETA) literature regarding Cap and Trade today.

With nearly 170 companies from several sectors like oil, electricity, cement, banking, consulting, legal, brokering, IETA has been the voice of global business on the subject of emissions trading since 2000. Some of IETA’s members include BP, Chevron, Deloitte, Dow Chemical, Edison Trading, JP Morgan and Chase, Holcim, GE, Morgan Stanley among others.

IETA’s stance is in strong support for a carbon market that uses exchanges, over the counter (OTC) markets and offsetting.  Per my readings, IETA suggests that the following are some of the main advantages of Cap and Trade:

  • Most cost effective and flexible approach to collectively meeting target—Global carbon trading could reduce global abatement costs by up to 70% in 2020
  • Incentive to spark a wave of entrepreneurial innovation and green investment in search for low-cost reductions
  • Ability to trade within the cap creates a financial benefit that serves as enticement for lasting change
  • Offsets through external projects produce ancillary economic benefits and allow reductions in industries not covered by a cap (forests, farms, ranches)
  • Offsets control cost in the early years of the system and provide time to invest in R&D of technologies that can be competitive in a longer term

Example of Success : Sulfer Dioxide— Proven to work in the US with 40 percent decrease in sulfur dioxide emissions in the United States since 1990 (A separate allowance scheme, but with no provision for trading,  achieved similar results for NOx.)

Ironically, later today I volunteered at KlimaForum09, and during a session I was presented with the opposing view to IETA’s. A panel composed of members from CarbonWatch, the Institute for Policy Studies and a climate scientist from International Rivers explained how carbon trading works and why it fails. We watched a short film “The Story of Carbon Trading” that simplifies the issue, and although it skips several intricacies, it is a great starting point for conversations.

The main disadvantages as presented by the panel were the following:

  • Cap and Trade is indeed a cheap method, (low hanging fruit) but what is cheap in the short term may not be in the long term
  • So far most permits have been “grandfathered” (given away) in essence rewarding those that have been the greatest polluters. Auctioning improves this only mildly and the question remains of weather these credits belong to the government in the first place in order to sell them?
  • Emissions saving projects ranging from building hydro-electric dams to capturing methane are administered by the Clean Development Mechanism (CDM) The carbon saving is calculated by measuring how much GHG would have entered the atmosphere (difficult to calculate) minus how much is prevented from entering due to the project. Dan Welch quote: “ Offsets are an imaginary commodity created by deducting what you hope happens fro what you guess would have happened”
  • Once taken out of the ground and burned, coal adds to the carbon cycle and the process for human purposes is irreversible as it cannot be locked underground to form new deposits.
  • Offsets are a mean to escape responsibility. Most are not real reductions as projects would have happened anyway.

Example of failure: Proven to fail in European Union Emissions Trading System Phase 1 (200-2005) Cap was too high. The price of the carbon commodity collapsed from 30 euros/tone to less than 1 euro cent. Phase 2 (2008-2012) Data for 2008 shows that offsetting allows for too many permits.


As an aside: When presenting so many drawbacks to a system the impulsive question is “What’s your solution?” The Occasional Papers Series by the Dag Hammarskjol Foundation suggests a rapid phasing out of fossil fuels and using the energy subsidy of US$300 billion per year for community led initiatives. Earlier today I listened to the US address by Mr. Sandalo of the DoE. In his statement he said coal would have to be a part of the solution. When asked why, he suggested that we need the entire gamut of energy technologies (including coal) to meet climate change. What do you think? Can we phase coal out or must it be present? Why?


Question: Can cap-and-trade reduce carbon dioxide emissions work as it did with sulfur dioxide?

Some Answer: Cap-and-trade cannot work for carbon. It would not be the same cap-and-trade as with sulfur dioxide. In the case of Sox, technologies, particularly scrubbers, existed to lower the emissions.


I have not yet decided exactly where I stand on the issue of cap and trade. Many of the discussions in the COP-15 have been geared towards offsets and the mechanisms that support them such as CDM and REDD. The discussions try to encompass several views from a scientific, economic to a social justice perspective including talks about the fairness of displacing those with the lowest carbon footprints to give credits to those with the greatest. This is indeed a complex issue, one that is both decisive and divisive.

In order to inform my opinion, I invite your comments, suggested readings, and shared knowledge.

Written by ANJULI JAIN.

2 thoughts on “Cap and Trade: What is your view?

  1. Eric Harold

    Great post, Anjuli. Well balanced and provides much to think about. We can’t think of cap and trade as the only mechanism. It seems, as i believe you mentioned, geared toward the low hanging fruit. And, as I’ve seen in other areas (I/I removal, just to throw that out to you and keep you thinking of what I hope will be your next move), low cost effective mitigation measures often provide the most benefit. But they are also followed by more intensive measure. With carbon emissions, we need to start now on a process for minimizing emissions and c/t seems best suited to do that. A carbon tax, the other more popular approach, i think would be a non-starter (look how far increasing gas taxes has gone). And I’m generally opposed to overtly regressive measure, which the gas tax would be.

    Interestingly, the NYT had an op-ed by climate scientist James Hansen, in opposition to cap and trade:

    This was countered in a blog post by Paul Krugman:

    And further commented on by Clive Crook in the Atlantic:

    Hope you’re enjoying things over there. Keep the great posts coming.



  2. Joshua "Fiasco" Cregger

    Another issue with SO2 was that it happened at a particularly fortunate time for the power plants since railroad prices dropped and low sulfur coal was suddenly available at cheap prices. Actually though, this gets at why it is important to have a trading mechanism. For power plants it may be quite difficult to decrease their emissions (expensive), so rather than limiting trading to just among power producers, having an integrated system allows them to gain from other industries that do have an easier time reducing. Just because there isn’t a solution for CO2 like there was for SO2 for every sector doesn’t mean that we can’t still get our emissions down.

    Also, another issue with the European market that caused the crash (in my opinion, more important than having a cap that was too high) was that the permits had an expiration date. I don’t think permits should have a strict date attached to them like that, if there is a need to force them to retire at some point, I think a gradual decrease in their usefulness is likely a better option (trade in two old permits for one new one or something of the like). Europe already learned this lesson, so I fail to see its value besides as a scare tactic. I suppose if I want to be more generous, it is important to keep in mind that markets aren’t always going to be perfect and that we need to be thoughtful and watch for design errors.


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