Cap and Trade: Alive and Well

, , president | September 5, 2014, 11:31 am EDT
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After reading his obituary, Mark Twain famously remarked that “the reports of my death are greatly exaggerated.” When a national climate bill failed in 2010, a lot of people said that so-called cap and trade programs to cut heat-trapping gases were dead. The claim was exaggerated then, and proven wrong now. Recent results in the northeast and California show that cap and trade is alive and well, and poised to expand in the next several years.

What is cap and trade?

Under cap and trade programs, governments establish an overall pollution cap and require polluters to obtain “allowances” from the government to emit pollutants. Polluters can then buy and sell these allowances from each other. If designed right, this market-based mechanism can cut pollution more effectively than the traditional approach of government “command and control” because companies have an economic incentive to cut pollution as much as possible in order to sell their allowances to others.

Unlike traditional command and control systems, cap and trade also puts a visible price on pollution, ending the immoral subsidy of giving away our air or water resources for free so that the environment winds up being treated as a sewer. Plus, cap and trade systems create an economic incentive for cleaner alternatives, such as renewable energy sources that do not pollute and therefore do not have to obtain allowances. In fact, when the cap and trade model was used in the 1990s to address acid rain in the northeast, it was so successful that The Economist called it “the greatest green success story of the past decade.”

Does cap and trade work?

Today, ten states, comprising about 30 percent of the national economy, have adapted the cap and trade model to lower the most important heat-trapping gas—carbon dioxide. Early results show the systems are working.

California’s system, begun in 2012, requires power plants, large manufacturers, and transportation fuel distributors to obtain allowances for the carbon dioxide emissions in these sectors. Between 2015 and 2020 the state will cut the total number of allowances by about 3 percent per year, thereby lowering overall carbon emissions by roughly 15 percent from current levels over the next six years. The latest auction in California, held in August, demonstrated a robust and stable market.

And nine New England and mid-Atlantic states have implemented a cap and trade program known as “RGGI” (the regional greenhouse gas initiative)—a program I formerly chaired. RGGI, in place since 2005, is on target to cut pollution from power plants by about 50 percent from 2005 levels (or about another ten percent from current levels by 2020). And today, RGGI released auction results that show the nine-state market is working there as well to put a price on carbon.

Emissions reductions under RGGI. Image: Environment Northeast

Emissions reductions under RGGI. Image: Environment Northeast

Importantly, these two programs do not just cap and trade. They improve upon the model with an innovative feature known as “auction and invest.” By auctioning most of the allowances off, states can then invest the proceeds in programs that reduce greenhouse gases further, often providing important pollution reduction and public health benefits in the process. In California, the proceeds go into a dedicated greenhouse gas reduction fund, a portion of which must benefit disadvantaged communities, while the RGGI states have invested the majority of the auction revenues in energy efficiency and renewable energy.

These auctions bring in revenue at a time when other funding mechanisms, such as gasoline taxes, are declining. Providing a stable revenue stream for programs designed to cut dangerous heat trapping gases is politically popular: a Republican legislature in New Hampshire and a Republican governor in Maine supported strengthening RGGI in 2012, while legislative leaders in California  just put a stop to an effort by oil companies to get a special exemption for transportation fuels. Equally important, this policy of auction and invest is bearing fruit: an independent analyst concluded that the first three years of RGGI investments alone will yield over $1.5 billion of benefits in lower electric bills and dollars kept in the region.

The future of cap and trade

Not only are these programs alive and well, but they are ripe for expansion. In the next two years, states will seek the most cost-effective way to comply with new EPA rules to cut carbon emissions from power plants. Cap and trade/auction and invest programs can be used by states individually, or better yet, by groups of states, which can allow a broader range of market participants to find the most cost-effective way to cut carbon pollution.

The magnitude of the challenge to address global warming sometimes feels overwhelming. But these successful cap and trade programs demonstrate that we do have the tools at hand to cut heat-trapping gas emissions. All we need is the political will to put them fully to work.

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  • Elizabeth Fisher

    Short of removing all subsides you could add a fee on carbon and rebate all that money back to households as suggested by Citizens Climate Lobby’s Carbon Fee and Dividend. Put a steadily rising fee on carbon at its source (coal mine, oil and gas wellheads), starting at $15/ton CO2 and rising an additional $10/ton each year. That’s a surrogate for removing the subsidies and begins to internalize all the externalities that are not included in the price of oil, coal and gas. It sends a clear price signal to investors and energy companies to start investing in cleaner energy and not the high carbon fuels. Then give 100% of that money back to households to help them deal with the increased prices of everything as those carbon fees get passed on. It’s a revenue neutral tax that conservatives can like because the money doesn’t go to grow the government. And liberals can like it because that monthly rebate to households will actually be more than the cost of living for 66% of households; only the upper incomes pay more because they consume more.

    Analysis by Regional Economic Modeling, Inc (REMI) an independent firm shows $400 billion/yr would be collected by Year 10 and the rebate would be $3456/yr for a family of four, 2.1 million jobs would be added, 13,000 premature deaths from the associated SOx and NOx air pollution would be avoided, CO2 emissions would be reduced 33% and RDPI (real disposable income, ie what’s left after a person absorbs those increased prices) increases $500 per capita. GDP grows by $83 billion. Those numbers increase to $600 billion collected, $4776/yr rebate, 2.8 million jobs, 14,000/yr premature deaths avoided, CO2 down by 52%, RDPI up to $800 per capita, and GDP up $75 billion by Year 20. Electricity prices peak in 2026 but decline after that.

    The key is the rebate to every household which cap and trade doesn’t have, but the fee and dividend can be used right along with cap and trade. The rebate makes people “whole” but also returns that money right back into the economy as ordinary people spend it right away on food, retail, healthcare, construction, and other labor intensive industries. It takes money away from the capital intensive oil, coal, and gas industries — who needs employees when you can cut off a mountain with a big machine? or set a well and pipeline oil or gas wherever? Coal miners today are already losing their jobs to modern mechanization.

    Find more detail at http://www.citizensclimatelobby.org

    • Thank you, Elizabeth, for your post on a fee and dividend approach. I agree that it has much to recommend it, and should always be on our minds as a long term strategy. I think that the on-the-ground success of cap and trade programs in California and the northeast help lay the groundwork for a national policy to put a price on carbon, however that is accomplished.

    • Elizabeth Fisher

      I agree they do lay the groundwork…a very good start. Would you consider including “put a price on carbon” as part of the UCS global warming recommended solutions? Economists are almost unanimous in recommending putting a price on carbon. Thanks.

      • UCS has consistently supported putting a price on carbon as a key strategy to reduce emissions of this dangerous heat trapping gas, and that continues to be our position. Thanks again, Elizabeth!

      • Elizabeth Fisher

        OK.. I see the suggestion to “recycling of auction revenues to consumers and businesses” in your Climate 2030 Blueprint Policies recos but it wasn’t explicit on your Web page. The footnote also says you couldn’t model it with NEMS. REMI used NEMS too and when you recycle 100% to consumers, NEMS can handle it. We find that the 100% recycle to consumers is the key to growing jobs, the economy and RDPI…without that the money doesn’t get back into the economy as quickly or efficiently to stimulate the labor market and grow GDP.

        Thank you so much for bringing attention to the issue of global warming, getting the great minds at UCS on it, and keeping it in the news.

  • SidTheScienceKid

    This is a HORRIBLE concept. Does one NOT see the obvious literal “make money out of thin air” trick that this non solution is ? It muddies the conversation about actually solving the problem by tossing even more monetary instruments in this pile. This is WRONG. If one REALLY wants to address the problem, remove all subsidies from the polluting parties! Stop putting lipstick on the pig.