What is 'Cap & Trade' and, is it a solution?

On November 4th, 2016, the United States, along with 195 other countries, began work on their commitments made in the Paris Climate Accord. Their goal is to limit global warming by reducing carbon emissions to below 1.5 degrees Celsius compared to pre-industrial levels. (United Nations Climate Change) However, the biggest question facing the Paris Climate Accord countries is how do we achieve this lofty goal? One key option that is heavily debated, especially within the United States, is using a system call cap-and-trade. Within a cap-and-trade system, the government puts an annual limit on the amount of carbon pollution allowed throughout multiple industries. This limit is then reduced each year to continuously lower the number of carbon gasses emitted until such a time as they meet the industry set target. This goal is achieved by distributing pollution "allowances" allocated to various companies through an auction system. Companies can then choose to either pollute to their allotted amount or to go above or below their allowances and sell or purchase additional allowances as necessary. ("Carbon Tax or Cap-and-Trade? - David Suzuki Foundation")



The cap-and-trade system had already shown success in the United States concerning acid rain pollution. In the 1990s, the United States implemented one of the first cap-and-trade systems, specifically looking at sulfur dioxide. After a staged roll-out and firm required reporting to the EPA, it is estimated that this cap will over time reduce the pollution from power plants to roughly one half of what was experienced in the 1980s and, due to the trade portion of the system, lead to an average cost savings of 33%. In addition, the European Union rolled out a cap-and-trade system for carbon emissions beginning in 2005 based on the success of the U.S. sulfur dioxide cap. While their first roll-out phase ran into some challenges, most likely caused by their overly generous cap levels, their second phase from 2008-2012 showed much more promise and continues to be refined today. (Horne) However, within the United States, a debate continues to rage over if the cap-and-trade system would once again be a promising solution.


Looking first towards the concerns of a cap-and-trade system, there are two key areas worth exploring. First, are the goals to reduce carbon emissions realistic, and second, how will a cap-and-trade system affect our economic growth and GDP? In the article, Federally Mandated Cap-and-Trade Policies Will Not Reduce Air Pollution, written in 2008, Economist Margo Thorning is quoted from her congressional testimony stating that to meet the reduction targets in carbon emissions per capita, the United States would have had to of reduced emissions by 13.8% between 2000 - 2012, 20.2% between 2012 - 2020, and by 27.6% between 2020 - 2030. Thorning shares that the technologies needed to achieve this are simply not yet available, and she is not alone in this belief. It is also stated that in a 2004 Science article, eighteen additional scientists re-affirmed her concerns. (Green)


The second key concern is how would the capping of carbon-based energy production affect our gross domestic product. In the 2010 article, Consumers' Costs for Cap-and-Trade Legislation Are Grossly Underestimated, an analysis of the Congressional Budget Office concludes that the estimated cost of a cap-and-trade system per household in 2020 would be $175. However, the article shares that what the CBO did not include in their assessment was the potential decrease in the gross domestic product resulting from the cap. This decrease would consist of both goods and labor force. Further stated is an analysis by the Heritage Foundation, which estimated that by 2020 in a cap-and-trade system, the GDP drop would be 161 Billion dollars. This would result in an actual cost per household of four at $1,870. (Kreutzer and Loris) Additional concerns are that as our economy grows, so too does the need for energy. Carbon capping could create a stalemate as green-energy solutions are implemented based on the overall carbon cap. Thus, affecting the GDP and giving way to increases in the cost of goods and services all while simultaneously lowering the number of workers in the carbon-energy fields until new, green-energy solutions are fully up and running. (Green)



On the other hand, those in favor of a cap-and-trade system speak to two key areas that would allow this system to flourish. Firstly, we can ensure that our carbon emission goals are met. Secondly, this system will enable the industry themselves, rather than the government, to decide how to implement new green technologies best. In the article, Cap and Trade Will Be Costly for Consumers, but It Is the Best Option for Reducing Carbon Emissions, writer Neal Dikeman shares that the main advantage of a cap-and-trade system is that it will ensure we meet our carbon goals through the regulation of the number and amount of allowances available each year. In comparison to a solution such as carbon taxing, where companies are taxed based on their annual carbon emissions but are not regulated to a particular amount, cap-and-trade will ensure that not only will the carbon produced annually fall within the goal budget but also that the additional taxation, such as that from carbon taxing does not fall to the consumer. (Dikeman)


The second area in which cap-and-trade can prove successful is allowing the industry to decide how to implement green-energy initiatives best. In the article Reduce greenhouse gases profitably; a regulatory system that rewards energy companies for innovations that boost efficiency can appeal to environmentalists and industry alike, written by Richard Munson in 2009, Munson states that "Output-based allowances are simple, keep the government from picking technology (which is always a bad bet), allow maximum flexibility for the market to lower fossil-fuel use, and encourage profitable greenhouse gas reduction. As with cap-and-trade systems, output-based allowances can be ratcheted down to ensure greenhouse gas reductions." (Munson) This approach encourages innovative thinking but rewards it by allowing the companies who transition from current carbon-based energy to green, renewable sources to quickly an edge in the market by selling unneeded allowances. In turn, those profits can be used to further green initiatives and reduce the consumer's overall cost. In addition, this process will allow job growth within the green energy sector to grow, albeit at the expense of the carbon-based energy sector. However, the CBO expects the total employment only to be moderately affected. ("Cap-and-Trade Legislation Will Create Only a Modest Increase in Homeowners' Energy Costs")


I find that climate change is an exceedingly challenging subject. While most people realize that yes, climate change is a current reality, there are still some that simply do not think that climate change is real. This fact alone creates a significant hindrance to not only the creation of a solution but also the implementation. Of the ongoing proposed solutions, I do feel that a cap-and-trade system is one that not only allows for a slower impact on our society overall but also guarantees a solution to the overall problem. Based on my research, I believe that our biggest hurdle with enacting a cap-and-trade system is the simple fact that change is hard. The majority of concerns with such an approach stems from the fact that globally, we will need to drastically alter how we generate energy and require additional changes on companies and workers to diversify their education and practices. While I believe that during the initial implementation of such a system, we would see an increase in the costs of goods and a dip in the GDP, as time goes on and efficiency is achieved, this would essentially even itself out.


We have already seen success in this type of program during the 1990s with the sulfur dioxide cap, and the European Union has made incredible strides in working out how to best implement this type of system over the past 15 years. There are also concerns about whether we have the technologies to allow for the change we need to see. While there have been advances within the green-energy field, there remains a long way to go. However, one of the significant areas holding us back in this regard is that energy companies are not focused on advancing new technologies unless they have to. A cap-and-trade system would encourage further research and development for the company's survival as a whole. Unless there is a reason to change, and unfortunately, a monetary incentive to do so, I do not believe we will be able to progress at the rate we need to be effective.


Works Cited


"Cap-and-Trade Legislation Will Create Only a Modest Increase in Homeowners' Energy Costs." The Green Movement, edited by Debra A. Miller, Greenhaven Press, 2010. Current Controversies. Gale In Context: Opposing Viewpoints, https://link.gale.com/apps/doc/EJ3010704222/OVIC?u=spri43060&sid=OVIC&xid=e25dc3db. Accessed 11 Dec. 2020. Originally published in The Estimated Costs to Households from the Cap-and-Trade Provisions of H.R. 2454, Congressional Budget Office, 2009.


"Carbon Tax or Cap-and-Trade? - David Suzuki Foundation." David Suzuki Foundation, 2017, davidsuzuki.org/what-you-can-do/carbon-tax-cap-trade/.


Dikeman, Neal. "Cap and Trade Will Be Costly for Consumers, but It Is the Best Option for Reducing Carbon Emissions." The Green Movement, edited by Debra A. Miller, Greenhaven Press, 2010. Current Controversies. Gale In Context: Opposing Viewpoints, https://link.gale.com/apps/doc/EJ3010704223/OVIC?u=spri43060&sid=OVIC&xid=4eca28fa. Accessed 11 Dec. 2020. Originally published as "Cap and Trade: How it Works and Why It Has Been the Option of Choice," www.cleantechblog.com, 2009.


Green, Kenneth P. "Federally Mandated Cap-and-Trade Policies Will Not Reduce Air Pollution." Pollution, edited by Louise I. Gerdes, Greenhaven Press, 2011. Opposing Viewpoints. Gale In Context: Opposing Viewpoints, https://link.gale.com/apps/doc/EJ3010157295/OVIC?u=spri43060&sid=OVIC&xid=1da5d9f6. Accessed 11 Dec. 2020. Originally published as "How Not to Address Climate Change," TCS Daily, 2008.


Horne, Matt. Cap and Trade Reducing Pollution, Inspiring Innovation British Columbia Global Warming Solutions Series. 2008.


Kreutzer, David W., and Nicolas D. Loris. "Consumers' Costs for Cap-and-Trade Legislation Are Grossly Underestimated." The Green Movement, edited by Debra A. Miller, Greenhaven Press, 2010. Current Controversies. Gale In Context: Opposing Viewpoints, https://link.gale.com/apps/doc/EJ3010704225/OVIC?u=spri43060&sid=OVIC&xid=4605027d. Accessed 11 Dec. 2020. Originally published as "CBO Grossly Underestimates Cost of Cap and Trade," Heritage Foundation, 24 June 2009.


Munson, Richard. "Reduce greenhouse gases profitably; a regulatory system that rewards energy companies for innovations that boost efficiency can appeal to environmentalists and industry alike." Issues in Science and Technology, vol. 25, no. 2, 2009, p. 67+. Gale In Context: Opposing Viewpoints, https://link.gale.com/apps/doc/A193006612/OVIC?u=spri43060&sid=OVIC&xid=c72d71c8. Accessed 11 Dec. 2020.


United Nations Climate Change. “The Paris Agreement | UNFCCC.” Unfccc.Int, United Nations, 2020, unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement. Accessed 11 Dec. 2020.

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