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Debate: Carbon emissions trading

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Should government adopt emissions trading to combat global warming? Pros and cons?


Background and Context of Debate:

Emissions trading (or emission trading) is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. It is sometimes called cap-and-trade.

In an emissions trading system, a central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emissions must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was needed. Thus, in theory, those that can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society.

The question facing governments is whether they should adopt an emissions trading scheme as a major component of their strategies to combat global warming. Numerous questions frame this choice and debate: Is an emissions trading scheme an effective way to reduce emissions and combat global warming? Does it harness the markets in the most effective way to bring about emissions reductions? Does a cap-and-trade system provide the greatest incentive for companies to innovate new technologies and approaches to reducing emissions? Is it superior in this regard to a carbon tax? What are the economic consequences of a cap-and-trade system? Is a cap-and-trade system the most efficient and flexible way to reduce emissions while preserving the integrity of an economy? Is it more efficient than a carbon tax? Will a cap-and-trade system damage an economy or kill jobs? Is a cap-and-trade system complicated, hard to understand, and costly to manage? Does it require a large government bureaucracy? How does this compare to a carbon tax? Which is more feasible? What do the case studies in Europe and elsewhere suggest? Which is more politically feasible? Would publics go for a cap-and-trade system? What are the social and environmental justice issues in this debate?

There are active trading programs in several countries. For greenhouse gases the largest is the European Union Emission Trading Scheme, which was initiated in 2005. In the United States there is a national market to reduce acid rain and several regional markets in nitrous oxide. Markets for other pollutants tend to be smaller and more localized. Emissions trading, though, is not wide-spread internationally. Many governments remain uncertain of its merits, and whether a carbon tax is a better idea? The debate remains open.

See Wikipedia's emissions trading article for more background.

Emissions: Is carbon trading effective at reducing emissions, combating global warming?


  • Carbon trading incentivizes companies to cut emissions: A cap-and-trade system provides companies with credits if they are able to reduce their emissions below an established level. They can then sell these credits for a profit. So, if a company takes action to reduce its carbon emissions below the designated level, than it can make a profit. This is a powerful market incentive that is more likely to cause companies to invest money in finding ways to reduce their carbon emissions. A carbon tax, conversely, only provides the incentive of cutting costs, and does not offer this important profit motive.
  • Emissions trading encourages investments in the best technologies. Bill Chameides, Chief Scientist at Environmental Defense. "Cap-and-trade: more effective than a carbon tax". 12 Feb. 2007 - "Subsidizing one or two targeted technologies with a carbon tax would discourage investment in others that may turn out to be more effective. Which technologies should receive these tax dollars? No one has a crystal ball that can determine for sure which will turn out to be most useful. History has shown that the marketplace does a better job of developing new technologies, and a tax takes money out of the marketplace. The solution is cap-and-trade. A cap-and-trade strategy provides the incentive for all segments of the economy to compete to discover the best ways to cut emissions."


  • Emissions trading wrongly allows companies to buy right to pollute. "The Case Against Carbon Trading". Rising Tide. Mar. 2002 - "Carbon Trading IS an Excuse to Avoid Real Emissions Reductions. The hopelessly compromised Kyoto Protocol now allows countries to meet all their emissions reductions with carbon credits bought through three forms of carbon trading; Joint Implementation, Clean Development Mechanism, International Emissions Trade. Some countries will certainly choose to buy credits rather than make any serious attempt to reduce their underlying dependency on fossil fuels."
  • Cap-and-trade systems create emissions caps arbitrarily Bailey. "Carbon Taxes versus Carbon Markets". 18 May 2007: "Carbon taxes also avoid the baseline quandary that bedevils carbon markets. For example, signatories to the Kyoto Protocol are supposed to cut their emissions of greenhouse gases by 7 percent below what they emitted in 1990. Why? That goal has no relationship to any specific environmental policy objective. In fact, achieving the cuts specified by the Kyoto Protocol goals would reduce projected average global temperatures by only about 0.07 degrees Celsius by 2050. And, as the stalled international negotiations about what to do after the Kyoto Protocol expires in 2012 show, it is very difficult to set new baselines. Also, where should baselines be established for rapidly growing economies like China and India, whose energy use and emissions are expected to more than double by 2030? Under the Kyoto Protocol, the natural baseline is what emissions would be without any restraints. However, calculating or predicting what a country’s emissions will be 20 to 30 years in the future is impossible to do with accuracy."

Economics: Is an emissions trading system economical?


  • Carbon trading encourages efficient emissions reductions "Why a Cap-And-Trade System Beats a Carbon Tax". (Conde Nast). 19 Apr. 2007: "The efficiency [of a cap-and-trade system] comes with the "trade" part. Let's say you have two power plants, each emitting 100 tons of carbon per hour. The first can reduce its emissions by 20 tons at a cost of $5 per ton, and the second can reduce its emissions by only 10 tons, at a cost of $30 per ton. Clearly the efficient thing to do is to make the former reduction rather than the latter, with the owner of the second plant paying the owner of the first plant to offset the first owner's extra costs [by buying carbon credits and the "right" to pollute from the first plant]."
  • Emissions trading reduces economic costs of greenhouse gas emissions. One of the strongest pieces of evidence supporting this argument is the United States sulfur dioxide cap-and-trade system, in which the economic costs of acid rain damage was dramatically reduced. According to the EPA, the benefits of the 1990 amendments exceeded implementation costs by a factor of four, with a maximum estimate of $1.4 trillion.[1]
  • Cap-and-trade systems are flexible in the global economy Nations that adopt a cap-and-trade system can later link their system into other cap-and-trade systems around the world. It would not be as easy for a carbon tax to achieve this. This is important in today's global economy, where multinational companies exist across borders.


  • Carbon trading relies on governments not markets to set caps. "Is carbon trading a market mechanism?": "There appears to be a misconception among many 'lay economists' that carbon trading is a 'market mechanism' while carbon taxes are not. However, government control of the quantity of an item being sold is no more of a market based mechanism than government control of the price. Where it counts, carbon taxes make far better use of market forces than carbon trading schemes."
  • Companies will pollute as much as possible before start of carbon trading. The main problem is that baseline emission allowances for companies are based on their past emissions. For this reason, a company has the incentive to emit as much as possible when these baselines are being set so that the baseline is above or at what the company is already emitting. If a company successfully tricks the system in this way, they will be able to emit carbon as they had before, with no reductions being achieved.
  • Negative economic costs of carbon trading outweighs environmental gain. "Carbon Markets Create a Muddle". Financial Times. 26 Apr. 2007: "Getting the amount of emissions a little bit wrong in any year [through a carbon tax] would hardly upset the global climate. But excessive volatility or unduly high prices of quotas on carbon emissions [as a result of a cap-and-trade system] might disrupt the economy severely."
  • Complicated cap-and-trade system requires costly administration. The costs of establishing and administering a cap-and-trade system could be substantial. It demands that a cap be set, monitored, and enforced. This is a highly complicated process, given the size of the energy market, and would demand substantial administrative oversight.

Feasibility: Is a carbon trading system feasible? Are there examples?


  • The EU Emissions Trading System is a success "Review of pilot phase of European Union Emissions Trading Scheme finds it to be successful". Denny Ellerman. 28 May 2007 - "An analysis of the historical emissions data by the economists suggests that abatement or environmental measure taken by companies had achieved a reduction of about 7 per cent, even allowing for the growth in emissions that accompanies growth in gross domestic product. The economists conclude ETS has been successful in helping to correct what they call the market failure that surrounds climate change, and in delivering the EU's commitments to reduce carbon dioxide (CO2) emissions under the Kyoto Protocol. The seven conclude that it will be central to future global climate negotiations. They also call for a global framework for managing climate policy in the long term."[2]
  • US cap-and-trade in sulfur dioxide was successful This program was initiated by US Congressional legislation in 1990, and has seen major reductions in the emission of sulfur dioxide since. This chemical is primarily responsible for acid rain; a dramatic problem in the Northeastern United States during the 80s that has since been effectively eliminated.


  • Governments under cap-and-trade systems have an incentive to "cheat" Governments have the incentive to establish conditions favorable to the performance of their own national companies. They can do so by, for example, offering more carbon credits than they should to the companies of their country. The EU's emissions trading system is the primary example of this occurring.
  • Global CO2 trading is not like US sulfur trading system. "The case against carbon trading". Rising Tide - "CO2 IS NOT SO2. The main model for carbon trading is Sulphur Dioxide (SO2) emissions trading under the US 1990 Clean Air Act. This programme faced none of the problems listed above- it was small (a few hundred companies), easy to monitor (one pollutant from one source-power generation), had permanent targets, and, above all, was conducted within one country with strong enforcement mechanisms."

Social: Are carbon emissions trading systems socially beneficial, fair?


  • Emissions trading involves sufficient democratic control Emissions trading does not make the environment and emissions into property and place all power in the hands of the markets. Rather, government is in charge of establishing the system through democratic processes and setting "caps". The public, therefore, are in charge of cap-and-trade systems. It is wrong, therefore, to argue that the environment is being turned into private property and that too much power is being put into the hands of private companies.
  • A cap-and-trade system is "progressive". TerraPass. "Carbon tax vs. carbon market: who would win in a fight?". 15 Sept. 2006: "Tradeable carbon credits, on the other hand, could conceivably result in a net transfer of wealth to the poor. Although the poor spend a bigger proportion of their income on energy, the wealthy consume a far greater amount of carbon in absolute terms. So under a cap-and-trade regime, we would expect the poor (and the energy thrifty) to have excess credits to sell to their more profligate neighbors."
  • Carbon trading fairly punishes inefficient polluters. Given the above argument, this is a more reasonable approach to rewarding and punishing an industry whose emergence pre-dates the environmental concerns surrounding carbon emissions. Polluters should be rewarded for taking steps to be more "efficient", opposed to being efficient already.


  • Emissions trading will worsen global inequalities "The case against carbon trading". Risingtide UK. 2002: "Market shares in the new carbon market will be allocated on the basis of who is already the largest polluter and who is fastest to exploit the market. The new "carbocrats" will therefore be the global oil, chemical, and car corporations, and the richest nations; the very groups that created the problem of climate change in the first place. What is more, with the current absence of "supplementarity", the richest nations and corporations will be able to further increase their global share of emissions by outbidding poorer interests for carbon credits."

Pro/con sources:



External links

See also

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