What do you think about cap and trade systems? That’s the question we asked in our last newsletter after discussing the waxing and waning of support for cap and trade after the past couple of decades.
And the survey results reinforce the fact that this is a confusing, messy issue. On the issues of whether or not they provide positive environmental benefits or whether they are effective at reducing the cost of regulating the environment, respondents were pretty much split.
Furthermore, while the majority of people felt that we should go ahead and implement new programs despite a poor economy, because they would promote innovation and job growth, many disagreed. And just to secure the point that there’s a lot of variables to consider, several of you offered comments about the viability of a carbon tax instead, how we decide what to cap and where the cap is set, and how cap and trade could be applied globally.
One thing everyone agreed on, however, was that we need more evidence on the effectiveness of cap and trade programs. Unfortunately, with waning political support for national cap and trade and uncertain futures for regional initiatives, we aren’t likely to see that evidence any time soon.
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The idea of a federal cap and trade program for carbon has died. Now New Jersey is pulling out of the Regional Greenhouse Gas Initiative. You may think that cap and trade is a government intervention destined for failure. If we had data from a functioning cap and trade system, we could see actual data on whether it works or not.
On Figure 1, there are three components of acid rain. Can you tell which have been subject to a federal cap and trade program?
Cap and Trade did not originate from the environmental lobby, in fact many environmentalists initially opposed the program. The support of then President George H.W. Bush and his administration for what was then known as emission or allowance trading used the “power of the free market to meet public goals. Bush’s support swayed sufficient Republican support to include cap and trade in the 1990 Clean Air Act.
What a difference a few decades make. Republicans have turned against what they now call Cap and Tax. We should be clear that the Cap and Trade system does function like a tax. It takes an externality – a cost that is not translated into a price mechanism – and it puts it on the balance sheet. The Cap and Trade system sets a cost that may or may not reflect the true price, but it also harnesses the power of the market to find a solution that may well be at a lower cost.
The success of the original Cap and Trade program, and our failure to establish a national Carbon Cap and Trade led the development of a number of regional greenhouse compacts between states. These programs are not likely to be as effective as a national system, but they have shown progress.
|Name||Geographic Region||Effective Date|
|Regional Greenhouse Gas Initiative (RGGI)||CT, DE, ME, MD, MA, NH, NJ, NY, RI, VT||January 2009|
|Western Climate Initiative (WCI)||AZ, CA, MT, NM, OR, UT, WA (US) and BC, MB, ON, QC (CAN), plus 13 observers (US, CAN, MEX)||TBD|
|Midwest Regional GHG Accord||IL, IA, KS, MI, MN, WI, MB (CAN)||TBD|
|State of California (CCAR now CAR)||CA||2012|
While there has not been enough time to really evaluate these programs, RGGI has been around longer. The RGGI states have reduced CO2 more than the rest of the nation (Figure 3). How much of that is due to the RGGI program is open to debate, but that is the debate we should be having.
Our Fourth Economy Survey asks your opinion of Cap & Trade Systems. Share your thoughts here.