New York Times Room for Debate – Cap and Trade

Can the Market Stave Off Global Warming?

New York Times, Room for Debate, June 1 2014


On Monday, Obama administration announced a plan to cut carbon emissions from power plants by up to 30 percent with the help of state cap-and-trade programs.

Cap and trade is one of the primary responses to global warming. It requires industries to have marketable permits to emit greenhouse gases. Reducing the permits would increase their price, lower emissions and stimulate innovation. Many say it has not worked out so well.

Is cap and trade the best chance for stemming climate change, or are other methods needed?

Debater 1: Robert N. Stavins, Harvard University

Cap and Trade Is the Only Feasible Way of Cutting Emissions

Robert N. Stavins

Robert N. Stavins is the Albert Pratt professor of business and government at the John F. Kennedy School of Government at Harvard University, and the director of the Harvard Project on Climate Agreements.

A national carbon-pricing regime is the only feasible way for the United States to reach its goal of reducing emissions to 83 percent below their 2005 level by 2050.

Because emission control costs vary drastically among the millions of diverse emissions sources, conventional regulations are unfeasible. Only a pricing regime provides incentives for the overall target to be achieved in the least expensive manner. In the long term it is economical because of incentives to adopt lower-cost, cleaner technologies.

The initial distribution of allowances in a cap-and-trade system offers a direct means of compensating for the inevitably unequal burdens imposed by a climate policy. It resists degradation by political forces, because its environmental and economic performance is unaffected by the initial distribution of allowances.

With 30 years of success, even if uneven at times, pricing regimes have provided incentives to achieve goals in the least expensive manner.

Internationally, it provides a straightforward means to link with other countries’ climate policies, which is exceptionally important for addressing this global problem.

Finally, experience favors cap and trade because it has a history of successful adoption and implementation over three decades.

In 1982, the Environmental Protection Agency put in place a trading program to phase out leaded gasoline. It produced a more rapid elimination of leaded gasoline from the marketplace than had been anticipated, and at a savings of some $250 million per year. Later, Congress enacted a law proposed by President George H. W. Bush to use cap and trade to cut sulfur dioxide emissions (and consequently acid rain) by half, at a savings of $1 billion per year.

As climate change has become an increasing concern, cap and trade has most often been the instrument of choice. The first and largest example is the European Union Emissions Trading System, which has covered electricity generation and large manufacturing, and is now being expanded.

But external factors in Europe have suppressed allowance prices, lowering incentives to cut emissions. The economic downturn has curtailed energy and allowance demand. “Complementary policies,” like Europe’s aggressive renewable power initiatives, have relocated emissions from electricity generation to other sectors with no net reduction. In the process, abatement costs have been driven up and allowance prices suppressed. Also, the anticipated termination of the Clean Development Mechanism created a temporary flood of offsets on the market. The European Commission is about to lower the program’s cap, bringing higher future allowance prices.

In the United States, the Regional Greenhouse Gas Initiative, begun in 2009, brought together nine Northeastern states in a cap-and-trade regime controlling electricity sector emissions. The combination of the recession, low natural gas prices and mild weather lowered emissions below the cap, but the states have now increased the program’s stringencyCalifornia’s ambitious cap-and-trade systemwill soon cover 85 percent of the state’s economy and reduce carbon dioxide emissions to their 1990 levels by 2020.

Add to these seven pilot carbon dioxide cap-and-trade systems in China, plus others up and running in Quebec and Switzerland, and still others planned in South KoreaIndiaChileBrazil and Mexico, and it becomes clear that cap and trade has emerged as the preferred approach for meaningful action to address climate change.

Debater 2: Doreen Stabinsky, College of the Atlantic

Strong Limits and Government Funds Are Best to Cut Greenhouse Gases

Doreen Stabinsky is a professor of global environmental politics at the College of the Atlantic, and a consultant to governments and nongovernmental organizations on agriculture and climate change.

Two sobering messages came out of the most recent report from the Intergovernmental Panel on Climate Change: the pace of climate change impact is increasing and our current emissions trajectory puts us on a certain path to dangerous levels of warming. Given these findings, it is clear that the world needs to reduce carbon emissions and transform our energy systems significantly and quickly.

Cap and trade is an indirect and often ineffective approach, at best, for a problem requiring urgent and direct action.

That’s why a global cap on carbon emissions, coupled with substantial investment in real and meaningful actions to achieve that cap, are essential for limiting the effects we are already experiencing and preventing more dangerous future warming.

Trading, however, is not part of the answer. In economic theory, trading might reduce the cost of emissions reductions by allowing those reductions to be carried out in locations where the effort can be made most cheaply. But trading is an indirect and often ineffective approach, at best, for a problem requiring urgent and direct action.

Take the example of the European Union Emissions Trading System, introduced in 2005. The scheme is a basic cap-and-trade system – a cap is set E.U.-wide, permits to emit are distributed to regulated industries, and the market is set in motion. The trading system is widely understood as a failure. The permits to emit have been consistently overallocated; market prices for those permits are currently close to zero, providing no incentive to anyone to reduce anything.

Trading systems generate so much successful lobbying by those who stand to profit that it has become impossible to achieve the primary objective of an efficient marketplace, let alone the secondary objective of emissions reduction. Emissions have been reduced across the European Union since 2005 not because of their trading system but because of the global recession of 2007and 2008.

If not trading systems, then what? A strong cap is an unquestionable necessity. And to make possible the rapid and significant reductions required by a strong cap, we need government investment in policies, measures, technologies and actions that directly bring about those emissions reductions.

Penalty fees for exceeding a mandatory cap would go directly toward investment that helps industries avoid those penalties in the first place. Direct government investment would enable policies and measures such as feed-in tariffs or net-metering that incentivize rapid adoption of renewable technologies, help farmers plug into the grid, and provide a positive signal and certainty to private investors in those technologies.

The answer is cap and invest. If we continue to fiddle with trading, the planet will burn.

Debater 3: Stig Schjolset 

Europe Shows Cap and Trade Can Work, With Strong Limits

Stig Schjolset is head of carbon analysis at Thomson Reuters Point Carbon, a provider of news and analysis for commodity markets.

Even as cap-and-trade systems and other carbon pricing mechanisms have come to encompass almost a quarter of global emissions, many have questioned whether they have significantly reduced carbon. This is especially true for the European carbon market where prices have tumbled to €5 (about $6.80) per ton, from €30 (about $41) per ton in 2008.

Cap and trade will be as effective as officials want it to be. Environmental targets define how much emission reductions programs will deliver.

But low carbon prices do not necessarily mean that Europe’s emissions trading system has been a failure. The main purpose of any cap-and-trade program is to reach an environmental target at the lowest possible cost. The target currently set by European Union policymakers is to reduce emissions to 80 percent of 1990 levels by 2020. Recent projections indicate that the European Union will meet this target by a comfortable margin. So low prices in the carbon market indicate that no additional reductions are needed over the next years.

In other words, the system has been functioning exactly as you would expect – prices have been high in periods where emission reductions are needed and low when cuts are being achieved. This is true even if the falling emissions mainly can be attributed to the recent economic recession, not to climate policies implemented across the European Union.

But what is important to keep in mind is that cap-and-trade systems will never be more effective than policymakers want them to be. It is the environmental targets put in place by politicians that will define how many reductions a cap-and-trade program will deliver.

The European Commission has now proposed that Europe should adopt a target to reduce emissions by 40 percent by 2030. If politicians support this, it will likely generate higher carbon prices over the next decade.

Thus, the European Union experience suggests that designed in the right way, in line with the polluter-pays principle and with a strong compliance regime, emissions trading systems will put an effective cap on carbon emissions – a cap that can be gradually tightened as politicians sign up to more ambitious reduction targets.

Debater 4: Rajendra Shende

Cap and Trade Does Little for Poorer Countries

Rajendra Shende is the chairman of the Terre Policy Centre in Pune, India, and was formerly the head of the United Nations stratospheric ozone protection program.

I was an observer from the United Nations at the jamboree that gave birth to the Kyoto Protocol in 1997 and began talk about cap and trade. Negotiators huddled and whispered of the “least cost options” to achieve carbon dioxide reductions. The backdrop for these meetings was the success of a cap-and-trade scheme to reduce emissions of sulfur dioxide and nitrogen oxides from power plants in the United States and rein in acid rain.

There is conspicuous absence of a globally agreed principle of how polluters should pay for damages in countries least capable of dealing with them.

As a technocrat, I could appreciate the double-edge effect of such a mechanism. Limiting industries’ emission levels and letting them sell surplus permits for emission reductions not only reduced emissions but sparked technology development for emission reductions to get additional permits. 

But the success of cap and trade in reducing acid rain doesn’t guarantee its success in affecting climate change. The final regulations for sulfur dioxide were the result of negotiations among environmentalists, free-market proponents, government and industry. It was the upshot of the battle of two domineering groups, farmers, whose crops were damaged by the acid rain, and power plants emitting the acidifying vapors. Farm products have to be assured and power plants have to be run. 

Reducing greenhouse gases like carbon dioxide by cap and trade is another story, particularly in developing countries, which have become more suspicious about “market mechanisms” after the financial crisis. Low carbon prices of the recent years have made cap and trade unworkable. 

Developing countries consider cap and trade a system that allows polluters to continue polluting. There is conspicuous absence of a globally agreed principle of how polluters should pay for damages in countries least capable of dealing with them. 

Cap and trade may work in rich countries with the capacity to pay for transaction costs and technology development. But the money made from selling surplus permits may or may not finance development of technology that reduces emissions. 

Most painfully for poorer countries, the glacial speed of cap-and-trade programs does little to address the most urgent challenge of climate change. The long-standing demands for $100 billion per year for developing countries to deal with the consequences of climate change appear forgotten. 

Do I hear the fiddle of Nero and the cries of the people sinking under the rising tides in the developing world?

Debater 5: Mary D. Nichols

California Is Showing How Cap and Trade Can Work

Mary D. Nichols is chairwoman of the California Air Resources Board.

There’s no question that a well-designed cap and trade system is one of the key tools we can use to significantly reduce carbon emissions. 

In 2007, when California set out to design a comprehensive economy-wide program to slash greenhouse gas emissions to 1990 levels by 2020 and much further thereafter, we extensively analyzed a range of possible ways to go about it. It quickly became clear, that along with other important programs to cut carbon from our energy sources, fuels, and vehicles, cap and trade needed to be part of the mix for two key reasons. 

Based on others’ experiences, we knew we should sell just a portion of allowances to set a consistent price, and to have strong enforcement.

First, there’s the cap. In addition to the investments we must make in cleaner, more advanced technologies, effectively dealing with global warming requires us to meet increasingly stringent greenhouse gas emission limits. This is not an option. It’s a scientific imperative. And the cap ensures that we can do this. In California, as we begin to look beyond 2020, we are already thinking about lowering the cap further to ensure we stay on track to meet our long-term emission reduction targets. 

Second, the essence of cap and trade is that businesses, not bureaucrats, are best positioned to decide which technologies, investments, and innovations are going to be most effective in reducing greenhouse gas emissions. This matters because long-term success in tackling global warming is going to require businesses to embrace advanced low-carbon technologies because it is good for their bottom lines, not just because policy-makers tell them they have to. 

California had the benefit of closely studying the programs of those who preceded us. We learned a lot based on their successes and missteps. We learned that by auctioning just a portion of allowances under the program we can establish a clear and consistent carbon price while also providing valuable funding for investments in ongoing efforts to cut emissions as the economy grows. But fundamentally what we learned is what we’ve known all along – that success most often boils down to good policy design, clear oversight and strong enforcement. If we get these ingredients right, cap and trade can be a potent force in helping us tackle global warming. 

As we just pointed out in our recently updated statewide climate action plan, the amount of carbon pollution related to California’s economy has fallen steadily over the last three years, which means we are getting more economic growth for each ton of greenhouse gas we produce. Clearly, we’re on the right track, and cap and trade is a big reason why.

Debater 6: Myles Allen

Carbon Capture Is the Best Answer to Climate Change

Myles Allen professor of geosystem science in the School of Geography and the Environment and Department of Physics, University of Oxford, and director of the Oxford Martin Program on Resource Stewardship. He was a lead author of the recent Intergovernmental Panel on Climate Change Scientific Assessment, but his opinions are his own.

If all we had to do to solve the problem of climate change were to reduce the flow of greenhouse gases into the atmosphere to a sustainable level, then a cap and trade regime, or simply putting a price on carbon, would indeed be a good way to start. But it isn’t.

Rather than relying rely on a slowly rising carbon price or slowly declining emission cap, capture carbon dioxide and dispose it securely.

The risk of dangerous climate change is overwhelmingly determined by the cumulative stock of carbon emissions over all time, not the rate of flow in any given decade. Carbon pricing and cap and trade are a great way of slowing down the rate at which we burn fossil carbon, but burning carbon slower won’t make a blind bit of difference if we still burn too much in the end.

Reserves of cheap and accessible fossil carbon exceed the amount we can still afford to dump into the atmosphere by a factor of two or more. So climate policy today comes down to a simple choice: are we going to force our children and grandchildren to choose between driving global temperatures to dangerous levels or forgoing all use of their fossil carbon energy; or are we going to divert some of the proceeds of our fossil-fueled prosperity to develop and deploy the technologies to allow future generations to use fossil carbon safely, without dumping the waste products into the atmosphere? There will always be demand for fossil energy (solar-powered helicopters, anyone?), and we will never be able to ban its use entirely: nor would I want my children to live in a world where such a ban was enforceable.

But there are proven ways of extracting fossil energy without polluting the atmosphere: you have to capture the carbon dioxide it generates, or an equivalent amount from elsewhere, and dispose of it by re-injecting underground or even “re-mineralizing” — turning it back into rock.

Of course, this comes at a price. Carbon capture is expensive, so modest carbon taxes or emission caps do absolutely nothing to promote it: they just make climate policy unpopular. Ultimately, the only way we will solve climate change is by making carbon capture mandatory. If we rely on a slowly rising carbon price or slowly declining emission cap, the best possible scenario is a headlong rush to carbon capture sometime in the 2050s, no doubt paid for by the long-suffering taxpayers of that time. It would be much safer to phase it in gradually by requiring the fossil fuel industry to start sequestering a fraction of the carbon they extract right away.

So, Mr President, don’t just mandate carbon capture on coal-fired power-stations: that’s not fair on those poor citizens of West Virginia. Scrap all these pointless carbon taxes and cap and trade systems, and require capture and disposal of a small but rising percentage of the carbon dioxide generated by every ton of fossil carbon entering the United States of America (including, of course, those tons coming down Keystone XL), and require your trading partners to do the same. Problem solved, your place in history assured.

Debater 7: Changhua Wu

Cap and Trade Is Crucial to a Cleaner, Market-Driven China

Changhua Wu is greater China director of the Climate Group. She has a blog , is on Twitter and the Chinese social network Sina Weibo.

There is no doubt that cap and trade can contribute to carbon emissions reduction. But cap and trade would not be able to address the challenges on its own or quickly enough. Different parts of the world can also adopt regulations on emissions, carbon taxes, incentives for innovation, and can provide education to change consumption behaviors.

Along with regulations, China has enlisted market-based instruments that in line with its development of a broader market economy. China, is where some of the biggest impacts through carbon pricing could be made.

The world’s biggest carbon emitter is now the world’s second largest carbon market.

The world’s biggest carbon emitter is now the world’s second largest carbon market. The country has six pilot emission trading systems in Beijing, Guangdong, Hubei, Shenzhen, Shanghai and Tianjin in operation and one more, in Chongqing, to be online next week. It is expected to launch a national trading system before 2020.

It’s capped emissions at the seven cities or provinces, with local measures used to calculate past and current emissions and forecast future emissions. The local cap is decided after negotiations among the government and businesses. The negotiation process builds consensus, lines up support for the program and raises society’s awareness of climate change.

Local regulations lay a solid foundation for local enforcement to complement cap and trade measures. Shenzhen Municipal Government took the lead last year to adopt a local regulation offering the required regulatory foundation for the market mechanism. Also last year, China’s first carbon market the Shenzhen Exchange, set an example of how to put a price on carbon with its success in overtaking the European Union price by 20 percent. While there are still challenges ahead for China, Chinese decision-makers seem determined to get adept at employing market-based instruments to transform its economy more efficiently towards low carbon prosperity.

Cap and trade pilot programs have encouraged companies and other facilities to more clearly measure their emissions to manage them better. With the local regulation and carbon trading mechanisms in place, industrial facilities and utilities are putting in place actions to reduce emissions.

The approach has also increased financing for cleaner development at the local level that could have national influence. Energy efficiency, renewable energy, electric vehicles, smart solutions are among the seven emerging strategic industries that are leading China’s clean revolution.