Carbon Cutting with Cap and Trade
A step in the right direction but far from ideal
It is essential, therefore, to have a worldwide remedy. That makes
the tax approach difficult, since there is no international tax
authority. Advocates say cap and trade is more suitable to a global
problem because the credit-trading system can work across borders. An
electric utility in China could buy permits from a cleaned-up oil
refiner in the United States.
Cap and trade has been used to attack carbon dioxide in the European
Union since 2005, in a process designed to meet member countries'
obligations under the 1997 Kyoto Protocol. Critics complained that the
first two years of the program were ineffective because too many
pollution credits were issued. Critics say the overabundance left
little incentive to cut emissions.
But defenders say the second phase of the program, which began in
2007, has been much more stringent, and the program has led to
formation of an active permit-trading market, which is essential to
making the system work.
President Barack Obama has strongly advocated an auction system for
carbon credits. Making companies pay for the right to pollute gives
them an immediate incentive to clean up and would produce revenue the
government could use to fund energy programs. But business groups have
lobbied against auctions, arguing they would be too expensive, and
lawmakers have backed off this requirement in order to get the
legislation passed. The Obama Administration supports the bill in its
current no-auction form.
That brought mixed reactions among environmentalists. Many were glad
to see progress, others were infuriated. Greenpeace and several other
environmental groups say they will not support the bill because it
would cut carbon emissions to only 4% below 1990 levels rather than the
25% to 40% they say is needed. The bill's goals for stimulating
renewable electricity sources -- 6% of electricity production by 2012
and 20% by 2020 -- are inadequate, they say, and issuing pollution
credits for free amounts to a "massive giveaway" to polluters.
"Despite the clear and present danger posed by global warming, there
is precious little leadership on the issue here in America and abroad,"
the groups said. "If America does not meet its responsibility to
control greenhouse gas emissions, it would be an invitation to
developing countries that they, too, can shirk their responsibilities
-- all but guaranteeing catastrophic climate change."
Business groups like the U.S. Chamber of Commerce also criticize the
bill, saying the credit allocation is unfair and that the program is
Despite the plan's shortcomings, cap and trade should work, says
Kleindorfer, arguing this approach satisfies a worldwide clamor for a
global warming policy, a general bias for market-based solutions over
government programs and the fact that money is tight in the financial
While government would set the emission caps, industries and
individual companies would be left to find their own ways to cut back,
"There's definitely an expectation that it will have to be markets
and market-based institutions that bear the primary responsibility for
moving ahead," he notes, adding,
"The government sets the cap and industry does the trading."
From his vantage point in Paris, he has seen rapid advances in
carbon-reduction measures during the past four years, with a lively
trading market for credits and widespread innovation in energy
efficiency. "It's just been astonishing to me just how much gold they
have found," he says. "You turn engineers loose with a dictate [to cut
carbon emissions by 20%] and they come back and say, 'What's with this
20 number? How about 30 or 40? And what's with 2020? How about 2015?"
If the U.S. passes the kind of legislation now moving through
Congress, carbon trading will jump from a $118 billion market in 2008
to $500 billion in 2012, he predicts. Other experts say the market
could exceed $2 trillion by 2020. The market-based system has spawned a
range of carbon-credit players, including brokers, traders, consultants
and financiers, and it has encouraged imaginative remedies that bring
together companies in unrelated industries, Kleindorfer says.
The overarching goal is not just to cut emissions in the United
States and Europe, but to get China, India and other major economies on
board, he argues. For that to happen, the U.S., a top carbon polluter,
must lead, and it has not been able to because former President George
W. Bush, arguing that compliance would be too expensive, did not send
the Kyoto Protocol to the Senate for ratification. Adopting cap and
trade would vault the U.S. into a leadership role, Kleindorfer argues,
especially if it were done before a December meeting in Copenhagen to
replace the Kyoto Protocol, which expires in 2012.
"If you don't have India, China and some of the other developing
countries like Indonesia and Brazil opt in... then you're not going to
solve the problem," Orts adds.
The bill still has to pass through other House committees before
being presented to the full House for debate, possibly this summer.
Then it faces a tough battle in the Senate, where a similar measure
failed last year.
"This is a kitchen-sink bill at the moment and a lot is in flux," White says. "So things could change."
Published June 2, 2009
Originally published May 27, 2009, in Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania. Republished with permission.