Carbon Taxes or Cap and Trade?

The state of California launched it’s carbon trading platform last week and, based on the early reviews, the launch went well. Greenhouse gas emission permits were sold to willing buyers with the final price settling in at $10.99/ton of emissions. This price was less than what analysts expected but, as is the case with most things, analysts’ models are just projections based on their expectations. While the permits sold out, the state Governments expectation for the sale was to bolster some of it’s dwindling coffers and the lower than expected price did not help.

But what is the real benefit of a cap and trade system for selling emissions? The way a cap and trade system works is that the managing entity, in this case the State of California, sets a cap on the emissions any company in the state can emit. Companies that buy these emission certificates can then sell (or trade) their certificates on the market if they emit lower than their cap. Where the company emits more than it’s allocated ‘quantity’ of emissions it has to go on the market to purchase more emissions certificates. These companies can range from Power plants to the neighborhood coffee shop that decides to do its bit for reducing emissions. If adhered to, and not just used as a mechanism to make money, a cap and trade system can yield the benefits of a capped emission output. Some limitations exist: where the number of participants are not enough to have a tangible impact the ‘reductions’ in emissions that the cap introduces into the system might be undone by companies that are not part of the system e.g. if company A and B participate and reduce their emissions by 5000 tons, their reductions can be erased by company C, which normally emits 2500 tons of CO2, releasing 7500 tons into the environment. California had been planning for this for several years.

Unfortunately the cap and trade system has not been widely encouraged across other states in the US. Part of the arguments against the implementation of cap and trades systems is the likelihood of market manipulation: what power plant buys emission certificates at a low price and sells these certificates for a high price on the market as the environment worsens and more aggressive caps (which would increase the price) are put in place? How equipped is the government to manage this market? Some of these concerns are valid as evidenced by the faltering of the cap and trade markets in the UK a few years agointerestingly I worked for a power station that was part of the cap and trade market in the UK and experienced the good and the not so good points of the system firsthand – and for this reason the cry has been for a more manageable system of emissions taxes. This system also has its opponents due to the fact that it is a tax and will most likely punish the general populace instead of achieving the real aim of any system: the reduction of emissions.

And that is where the point is being lost: the real goal of any system developed should be to reduce emissions. Research, development, adoption and utilization of emissions reducing technologies like exhaust after treatments (yes they do exist) is one way that most of the proponents of cap and trade or carbon taxes agree on. This is where the push should be as it provides a win-win-win for the economy (job creating companies), for the government (taxes and return on research investment) and, most importantly, for the environment (in the form of reduced emissions). Let’s not take our eyes off the ball here…

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