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Think Again about Cap and Trade

Submitted by EFC Team on May 1st, 2013

Think Again about Cap and Trade

Robert Repetto

It’s time to get serious about stopping climate change. As the draft National Climate Assessment by the U.S. Global Change Research Program makes clear, without strong action the damages from heat waves, droughts, flooding, hurricanes and other extreme weather events will continue to worsen, creating even more human and economic disasters.

The situation demands a comprehensive national climate policy. Congress should enact an economy-wide penalty on carbon emissions, a price on carbon that will give every household and business an economic incentive to reduce fossil fuel use and yet will allow complete flexibility on how to do that.

The best way to do so is through a national cap-and-trade system, like the ones already in place in the Northeastern states and in California. Although this approach has been demonized by political opponents in the recent past, it would be a much better policy choice than the carbon tax that is once again under discussion.

Cap-and-trade systems have an excellent track record. When used to manage the phase-out of leaded gasoline, emissions that cause acid rain, smog-forming emissions in California, and even excessive water pollution, compliance was high, emissions fell on schedule or even faster, trading markets worked, innovative approaches to pollution control were encouraged, and compliance costs were lower than they would have been under conventional regulatory approaches.

Although a climate cap-and-trade bill failed in the Senate in 2010, the situation now is different. As EPA prepares to take action under the Clean Air Act to restrict carbon emissions, businesses will once again see that the flexibility of a cap-and-trade system can lower their compliance costs substantially.

The United States would not be acting alone. Europe has operated a cap-and-trade system for five years. China intends to have one in place by 2015 and is already running pilot systems in major industrial regions. Canada, Japan, Australia, Korea, Mexico and other countries are moving in this direction and would be encouraged to do more if the U.S. acts.

The other way to create a price on carbon, a carbon tax, faces strong headwinds from anti-tax politicians in Congress. It’s a less effective way to control the pace of emissions reduction. Economists can’t predict how high a tax would be required to reduce emissions as needed.

In contrast, a cap-and-trade system would set a definite trajectory for emissions and let the market decide the price on carbon. Auctioning emissions permits could raise revenues to reduce budget deficits, compensate low-income households, or protect sensitive industries, just as a carbon tax could do.

If atmospheric concentrations rise above the levels previously experienced during human history, the risks are unfathomable, but the outcome is unlikely to be a happy one.  Control costs are like investments in police protection or homeland security – aimed at preventing personal or national catastrophe – and climate policy should be designed to ensure that the worst possible outcomes do not happen. For that reason, the option that provides better control over future emissions is the one that should be adopted. That is cap and trade.

Robert Repetto, Ph.D., is an economist and Senior Fellow in the United Nations Foundation’s climate and energy program.  A paper developing this argument in greater detail appears on the Energy Future Coalition’s web site, www.energyfuturecoalition.org.

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