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
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.