Last month in the New York Times, Kate Galbraith noted that the campaigns of both Barack Obama and John McCain presented widely differing views on climate change and energy policy, particularly with regards to cap and trade schemes, market-based policy instruments intended to maneuver industrial sectors into reducing their greenhouse emissions. Cap and trade schemes have recently been gaining much currency within the discussions of environmental policy as a means to address the negative impacts which industry has upon the greenhouse problem.
Such systems work by creating a financial incentive for emission reduction through the imposition of costs on emissions. By establishing a ‘cap’ which limits the total amount of emissions that can be made by a designated group of polluters and leaving them free to trade permits to pollute with one another, it encourages these polluters to meet or fall below the cap in a flexible market-based fashion, rather than forcing them to comply with stringent regulations that could needlessly compromise their business operations.
Companies able to cut their emissions can further profit from selling their permits to those companies facing difficulty in reducing their own emissions. The incentive is that all the companies would choose to bring their emissions to cap levels and try to do so in the most cost-effective fashion. It encourages them to innovate the means to reduce emissions.
Other governments have already taken action to introduce cap-and-trade schemes of their own: Australia has the New South Wales Greenhouse Gas Abatement Scheme; the Climate Change Response (Emissions Trading) Amendment Bill was recently enacted in New Zealand; and the European Parliament has its own system known as the European Union Emissions Trading Scheme. At present, no system similar to these exists in federal law, and representatives for both candidates – Dan Esty for Barack Obama, Douglas Holtz-Eakin for John McCain – maintained that this should be remedied as soon as possible.
Where they disagree is how such a system should be structured. According to Esty, Obama favors distribution of emissions permits through auction, as this would force polluting businesses to pay competitively during initial distribution. Speaking for McCain, Holtz-Eakin advocates pre-determined distribution, limiting transactions to the permit trading market itself. The design of a cap and trade system is not a trivial matter. A poor design can wreck the efficacy of a cap and trade system as a policy instrument.
If permits are distributed too generously, as Holtz-Eakin proposes, what could result is a situation in which industries have little incentive to expunge their business operations of greenhouse emissions, as they would effectively be operating in a trading market where permits are near worthless. Also, cap and trade systems cannot stand alone as an emission-reducing policy instrument, as there is a potential for traders to ‘game’ the market by deliberately holding out on purchasing permits until the last minute so as to reduce their value, making unreduced emissions affordable to even the worst emitter.
Furthermore, cap and trade systems lack transparency and present opportunities for fraud. Worse still is that a poorly designed cap and trade system will not account for the geography of polluters, resulting in a NIMBY effect where pollution becomes localized to create ‘emissions ghettos. ’ As such, it should be recommended that any cap and trade system be designed to account for environmental justice, be subject to transparency, and should distribute permits at a market price, perhaps even stabilize such a price at a level high enough to incentivize the development of techniques and technologies to reduce emissions.
Furthermore, a cap and trade system must be complemented by other policy instruments such as pollution zoning and carbon taxes. Works Cited Galbraith, Kate. “Candidates’ Advisers Spar Over Cap-and-Trade. ” New York Times. 23 September 2008. Retrieved online November 9, 2008 from: http://greeninc. blogs. nytimes. com/2008/09/23/candidates-advisers-spar-over-cap-and-trade/? scp=3&sq=cap%20trade&st=cse Parker, David. “Historic climate change legislation passes. ” New Zealand Government. 10 September 2008. Retrieved online November 9, 2008 from: http://www.
beehive. govt. nz/release/historic+climate+change+legislation+passes Greenhouse Gas Reduction Scheme 2008, Introduction to the greenhouse gas reduction scheme, Greenhouse Gas Reduction Scheme. Retrieved online November 9, 2008 from: http://greenhousegas. nsw. gov. au/documents/Intro-GGAS. pdf Pearce, Fred. “European trading in carbon-emission permits begins. ’” New Scientist. 6 January 2005. Retrieved online November 9, 2008 from: http://environment. newscientist. com/channel/earth/dn6846-european-trading-in-carbonemission-permits-begins. html
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