Emissions trading (Cap & Trade) is a “managed” approach to control pollution by providing economic incentives for reducing the emissions of pollutants. It is the “Pavlov’s Dog” of pollution, as simply “asking” companies to reduce pollution does not seem to be effective unless there is a vehicle to measure that reduction and a way to enforce it.
In this system, a central authority (Government) 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 (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.
Now, what if a company needs to increase their emission allowance? These companies might buy credits from those who pollute less. The transfer of allowances is referred to as a trade. So essentially, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was needed. So the theory goes, that those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society.
The overall goal of an emissions trading plan is to minimize the cost of meeting a set emissions target. However, because emission trading uses markets to address pollution, it is often referred to as “Free market environmentalism”, however to be effective it requires a cap and that cap is a government regulatory mechanism. After the cap has been set, companies are free to choose how or if they will reduce their emissions. Failure to do so is often punishable by fines, which may increase the cost of production, which in turn could be passed onto the consumer- in the short term.
However, if a company takes the effort to apply sustainable business practices or more efficient production techniques, which can reduce their emissions, their long term costs could decrease, and the stability in their company might increase, as this effort might translate into more jobs in the future, and better services and products that are more cost effective. As we can see by the plethora of recalls; making products “cheaply” is not always the best approach for society and our environment, or even for a company- long term.
Carbon trading has been steadily increasing in recent years, and companies have formed groups such as the G8 Climate Change Roundtable stressing the importance of market-based solutions calling upon governments to establish long term policy framework that would include all major producers of greenhouse gases. Critics argue that cap & trade does little to solve pollution problems overall, since groups that do not pollute sell their conservation to the highest bidder- which might be more cost effective for a company to purchase these allowances than to change their “polluting ways”.
So how might this impact the average consumer’s wallet? The Stern Report estimates the cost of mitigating climate change would be 1 per cent of GDP worldwide. However, the cost of doing nothing would be 5 to 20 times higher. So we seem to be trapped in the “Pay now or Pay Later” option.
With the EU adopting the 2nd phase of the EU ETS supporting the Kyoto Protocol; an international treaty that binds developed nations to a cap and trade system for 6 major greenhouse gases (The US is the ONLY nation not ratified or bound by it), and the passage of the American Clean Energy & Security Act (Cap & Trade Bill) last June, it is inevitable that this sort of system is coming sooner than later.
