Subject to Misbehavior

Still, much is uncertain, says Noam Lior, professor of mechanical engineering and applied mechanics at Penn's School of Engineering and Applied Science. He notes that the quality of emission monitoring would be the key to cap-and-trade success. The bill "is a very good step in the right direction, but it's far from ideal. It's quite confusing and also subject to a whole bunch of misbehavior," he says, pointing out that many industries work hard to skirt regulations.

After years of debate, most scientists now agree that the world's climate is warming, and that the release of carbon dioxide from the burning of coal, oil and other fossil fuels is the chief cause. Greater use of carbon-free alternatives such as wind, solar, nuclear and geothermal energy can help reduce the problem, but carbon fuels are expected to be essential to the world economy for many decades. Scientists and policy makers have been searching for ways to reduce reliance on carbon fuels and to reduce the carbon emitted when they are consumed.

The simplest approach is to place a tax on carbon emissions, giving manufacturers, power companies, automobile owners and other energy users a financial incentive to cut back or invest in cleaner technology.

A carbon tax would be fairly simple to administer and would generate revenue the government could use to support environmental research or to provide relief to those who would suffer most as fuel prices rose, such as the poor.

"If you just look at the general issue from a pure academic and economic point of view, then many people are supportive of taxes -- without considering the politics," says Eric W. Orts, director of Wharton's Initiative for Global Environmental Leadership. "As a theoretical matter, there's a lot to be said for taxes. But practically, I think, there are a lot of reasons it is not viable right now. First, 'tax' is a four-letter word in the United States."

And there is no guarantee the tax revenue would not be diverted to other purposes.

"As soon as Uncle Sam is in the middle of that process -- even though I'm a big fan of Uncle Sam -- he kind of gets in the way," Kleindorfer says.

For many, cap and trade is a more palatable alternative. "It's really done as a political device," says White, noting that cap and trade doesn't look like a tax, even though it would increase energy costs, just as a tax would, as polluters pass costs on to consumers.

To work, cap and trade must lead to higher fuel costs, or else there would be no incentive to cut back. But it's easier to sell the public on a "market-based solution" than a government-imposed tax, Kleindorfer says.

Under cap and trade, the government would set limits on carbon emissions -- caps -- and issue "credits" allowing factories, refineries and other energy users to emit given amounts of carbon dioxide. Typically, one credit conveys the right to emit one ton of carbon dioxide, about the amount created by burning 100 gallons of gasoline. Initially, 85% of credits would be issued for free, with specific allocations to given industries such as electricity utilities, car makers and oil refiners. The remaining credits would be auctioned at a minimum of $10 each.

Companies that find ways to emit less than they are allowed could sell their excess credits at market-based prices to firms that find reducing emissions too difficult or expensive. In theory, this means emission reduction is done by firms that can do so at the least cost, keeping the economic impact to a minimum. Over the years, the caps would be gradually reduced and more of the credits sold at auction, with prices presumably rising as supplies got smaller.

In the U.S., a cap-and-trade system has been used for nearly two decades to reduce emissions of sulfur dioxide, the cause of acid rain, to less than half of 1980 levels.

"That is widely considered to be one of the most successful environmental measures in the 20th century," says White. "Cap and trade is more compatible with the capitalist system," Lior says. "It works well with the sulfur dioxide emission control."

Orts, however, notes that much of this success can be traced to technological breakthroughs that made it relatively cheap and easy to reduce sulfur dioxide emissions. Also, sulfur dioxide is washed out of the atmosphere by rain, limiting the effects to areas downwind of emitters like coal-burning power plants. Carbon dioxide is different, dispersing throughout the atmosphere from every release point to aggravate the problem worldwide.