Cap-and-trade: the triumph of politics over economics, science.

AuthorFrodl, Michael G.
PositionEnergy

The cap-and-trade bill that Congress is debating has been designed not so much to address the challenge of climate change or even put a good economic model in place to solve emissions reductions, but mainly to overcome political resistance.

Some critics question why the legislation won't embrace a more transparent and predictable carbon tax. The energy sector, overwhelmingly, favors a carbon tax over cap-and-trade.

But the "t" word is why the politicians are not going along. Tax, they fear, has horrible connotations, while cap-and-trade seems innocent and fuzzy by comparison.

So what exactly is cap-and-trade?

It was a solution developed 20 years ago to deal with the problem of "acid rain" in a region downwind of coal burning utilities in the Midwest. The acidified rain was burning and killing trees in the eastern United States and Canada. Instead of setting a regional cap for sulfur emissions that contribute to acidification of rain, the United States created a permitting system. At the beginning, everyone received just enough permits to allow the emissions as they were occurring. As time would go on, the permits would be traded at auction and resold. But the growth in the emissions would be capped. Since the market as a whole could not exceed the aggregate emissions cap, the permits would rise in value over time.

The system worked better and faster than anyone had expected. Upgrades were adopted speedily, permits traded effortlessly, and targets met faster and for much less cost than forecast.

The legend of cap-and-trade was born.

Some advocates such as NASA scientist James E. Hansen, who was one of the pioneers in warning about global warming, still argue for a carbon tax. Cap-and-trade as pitched to politicians and voters alike may get some confused reactions at first, but it does not get any of the negatives associated with the words carbon tax. Although in essence, once all the numbers are sorted out, cap-and-trade is in effect a tax.

The really troubling part is that the system may not lead to any improvement in the campaign to reduce carbon dioxide (C[O.sub.2]) emissions. A less politically popular tax might do more.

The original cap-and-trade was the solution to a regional problem: a U.S.-Canada cross-border issue. Only two players needed to agree to the rules and play by them. The problem with the cap-and-trade for C[O.sub.2] is that global warming is a worldwide problem. That means that unless and until every nation agrees to play...

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