Before talking about Cap and Trade, one first has to understand pollution control. Note that I am using the term “pollution control” (a tangible, measurable phenomenon) as opposed to “climate change” (a debatable, difficult-to-measure phenomenon).When talking about pollution control, one has to be sensible. Americans are not going to park their cars and start cycling to work any time soon. On the other hand, it doesn’t make sense to drive your SUV two blocks to buy milk, either. Any good economist will tell you that to control pollution you have to control behavior. This means either putting incentives on green, putting disincentives on brown, or both. And you have to do it without killing the economy.
Say that you own a company that produces 1 tonne of pollutants per day of production. If you were to build infrastructure to reduce that pollution, it would cost you $50/tonne. Since there is a cost with no equivalent savings, there is no inventive to implement pollution control measures. But, if the Government were to start fining you $60 per tonne of pollutants, suddenly there is an incentive not to pollute: your company saves $10/tonne to build the anti-pollution infrastructure. The point is, while free market economics takes care of most issues of industrial production, pollution is rarely one of them. Pollution control has to be mandated.
Measures that have been already been used to control pollution include taxes on gasoline, emissions taxes for corporations, tax credits for buying low-energy home appliances, banning polluting substances (such as DDT and CFCs), and rebates to convert gasoline vehicles to natural gas. So how about Cap and Trade?
Cap and Trade -- also known as cap-and-tax by those who oppose it -- is the name given to a system where a central authority (ex. Government) sets a limit on the amount of pollution that can be emitted. Companies are issued credits, giving them the right to produce a specific amount of pollution (that is reasonably low). If they are efficient (pollute less than their allowance), they can sell their excess credits to other companies for cash. If they are inefficient (pollute more), they need to buy credits from other companies to avoid heavy fines. In other words, there is an economic incentive to meet pollution targets and become more efficient. In theory, it’s a good idea.
The problem with Cap and Trade is that it is complicated and easy to manipulate. If a company manufactures energy-efficient camp stoves, for example, and sells them to African villagers to replace their dung-burning stoves, should they be able to claim credits? If they plant a forest of trees, should they get credits? If a fire destroys the forest, should the credits be taken away? It’s all very opaque. This is not to mention the potential for corruption when big businesses trade credits for cash. And, who decides how many credits to give out, anyway? Will the amount of credits issued rise during an economic crisis, so that businesses can save money?
In my opinion, the best solution is to keep doing what we are already doing. When I visited California as a kid, the smog was so thick it literally made my eyes water. After California passed a law requiring low-emission mufflers, the smog cleared up. When I visited England as a child, households burned coal for heat and buildings looked filthy. Since the government expanded the infrastructure for natural gas and gave incentives to switch, the same buildings now look pristine. When my mother was a child, DDT was a common pesticide. After it was determined to be dangerous, DDT was banned.
The American Clean Energy and Security Act, now in Congress, includes many elements similar to those that have already proven successful; for example, increasing standards of energy efficiency for buildings, modernizing the electrical grid, giving incentives for energy efficient appliances, and requiring large utility companies to obtain some of their energy from renewable sources. But Cap and Trade is also a primary element of the bill.
Cap and Trade isn’t a terrible idea, I just don’t believe it is the best idea. Contrary to some news reports, most major companies support pollution control: it is good for public relations as well as the environment. But they want the playing field to be fair. Existing pollution control measures work and should be expanded. The Cap and Trade portion should be removed and replaced with carbon control measures, tailored to local areas and individual industries.
