A careless manufacturer spewing noxious chemicals into the air, for instance, did not have to pay when the paint peeled off houses downwind—and neither did the consumer of the resulting product. Pigou proposed making the manufacturer and customer foot the bill for these unacknowledged costs—"internalizing the externalities," in the cryptic language of the dismal science. But nobody much liked Pigou's means of doing it, by having regulators impose taxes and fees. In , while studying pollution control in the Great Lakes, University of Toronto economist John Dales hit on a way for the costs to be paid with minimal government intervention, by using tradable permits or allowances.
The basic premise of cap-and-trade is that government doesn't tell polluters how to clean up their act. Instead, it simply imposes a cap on emissions. Each company starts the year with a certain number of tons allowed—a so-called right to pollute. The company decides how to use its allowance; it might restrict output, or switch to a cleaner fuel, or buy a scrubber to cut emissions. If it doesn't use up its allowance, it might then sell what it no longer needs.
Then again, it might have to buy extra allowances on the open market. Each year, the cap ratchets down, and the shrinking pool of allowances gets costlier.
As in a game of musical chairs, polluters must scramble to match allowances to emissions. Getting all this to work in the real world required a leap of faith. The opportunity came with the election of George H. EDF president Fred Krupp phoned Bush's new White House counsel—Boyden Gray—and suggested that the best way for Bush to make good on his pledge to become the "environmental president" was to fix the acid rain problem, and the best way to do that was by using the new tool of emissions trading.
Gray liked the marketplace approach, and even before the Reagan administration expired, he put EDF staffers to work drafting legislation to make it happen. The immediate aim was to break the impasse over acid rain. But global warming had also registered as front-page news for the first time that sweltering summer of ; according to Krupp, EDF and the Bush White House both felt from the start that emissions trading would ultimately be the best way to address this much larger challenge.
It would be an odd alliance. Gray was a conservative multimillionaire who drove a battered Chevy modified to burn methanol. Dan Dudek, the lead strategist for EDF, was a former academic Krupp once described as either "just plain loony, or the most powerful visionary ever to apply for a job at an environmental group. Many Environmental Protection Agency EPA staffers mistrusted the new methods; they had had little success with some small-scale experiments in emissions trading, and they worried that proponents were less interested in cleaning up pollution than in doing it cheaply.
Congressional subcommittee members looked skeptical when witnesses at hearings tried to explain how there could be a market for something as worthless as emissions.
Nervous utility executives worried that buying allowances meant putting their confidence in a piece of paper printed by the government. Environmentalists, too, were skeptical. Some saw emissions trading as a scheme for polluters to buy their way out of fixing the problem.
Joe Goffman, then an EDF lawyer, recalls other environmental advocates seething when EDF argued that emissions trading was just a better solution. Other members of a group called the Clean Air Coalition tried to censure EDF for what Krupp calls "the twofold sin of having talked to the Republican White House and having advanced this heretical idea. Europe has embraced cap-and-trade rules. Emissions initially rose there because industries were given more permits than they needed, and regulators have since tightened the caps.
Meanwhile China, India and other developing markets are reluctant to go along, fearing limits would curb their growth. If they don't participate, there is little assurance that global carbon emissions will slow much even if the U. And even if everyone signs up, Mr. Crocker says, it isn't clear the limits will be properly enforced across nations and industries. The other problem, Mr.
Crocker says, is that quantifying the economic damage of climate change -- from floods to failing crops -- is fraught with uncertainty. Without knowing how costly climate change is, nobody knows how tight a grip to put on emissions. In this case, he says Washington needs to come up with an approach that will be flexible and easy to adjust over a long stretch of time as more becomes known about damages from greenhouse-gas emissions. Crocker says cap-and-trade is better suited for problems where the damages are clear -- like acid rain in the s -- and a hard limit is needed quickly.
For you. Measure content performance. Develop and improve products. List of Partners vendors. Cap and trade is a common term for a government regulatory program designed to limit, or cap, the total level of emissions of certain chemicals, particularly carbon dioxide, as a result of industrial activity.
Proponents of cap and trade argue that it is a palatable alternative to a carbon tax. Both measures are attempts to reduce environmental damage without causing undue economic hardship to the industry. A cap-and-trade program can work in a number of ways, but here are the basics.
A government issues a limited number of annual permits that allow companies to emit a certain amount of carbon dioxide. The total amount permitted thus becomes the "cap" on emissions. Companies are taxed if they produce a higher level of emissions than their permits allow. Companies that reduce their emissions can sell, or "trade," unused permits to other companies.
But the government lowers the number of permits each year, thereby lowering the total emissions cap. That makes the permits more expensive. Over time, companies have an incentive to invest in clean technology as it becomes cheaper than buying permits. The cap-and-trade system is sometimes described as a market system.
That is, it creates an exchange value for emissions. Its proponents argue that a cap-and-trade program offers an incentive for companies to invest in cleaner technologies in order to avoid buying permits that will increase in cost every year. Opponents argue that it could lead to an overproduction of pollutants up to the maximum levels set by the government each year.
They predict that the allowable levels could be set too generously, actually slowing the move to cleaner energy. One issue in establishing a cap-and-trade policy is whether a government would impose the correct cap on the producers of emissions.
A cap that is too high may lead to even higher emissions, while a cap that is too low would be seen as a burden on the industry and a cost that would be passed on to consumers.
Environmental activists argue that a cap-and-trade program is by definition a sure way to prolong the active life of polluting facilities by allowing companies to delay action for years until it becomes economically infeasible. In , the European Union EU created the world's first international cap-and-trade program with the goal of reducing carbon emissions.
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