Cap and trade

"Cap and trade" is a quota system designed to regulate carbon emissions in order to slow global warming. It has been promoted by the Obama Administration, and passed the House with liberal votes in 2009.

Estimates of the cost vary widely. A 15% cut in carbon emissions would cost the average American household about $1,600 a year, according to March 12, 2009, Congressional Budget Office testimony. Climate legislation passed by the House in June offsets most of the cost to consumers by returning some of the revenues to offset any significant spike in electricity costs.

Environmentalists are pushing the proposal, but industry is opposed and prospects for final passage have dimmed, as the Recession of 2008 and the the huge federal deficit make additional burdens on the economy problematic. The Democratic Caucus is split over the bill, with coal-, oil- and manufacturing-state Democrats raising concerns that a cap-and-trade system would disproportionately raise electricity bills for consumers and business in their states.

Politically safe alternatives have been proposed. The Senate Energy and Natural Resources Committee approved energy legislation with bipartisan support in June 2009 that mandates utilities provide 15% of their power from renewable sources by 2021. This legislation could furnish a bipartisan energy bill that leaves out cap and trade.

Obama

 * "Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket," Obama said in Jan. 2008. "Coal-powered plants, you know, natural gas, you name it, whatever the plants were, whatever the industry was, they would have to retrofit their operations. That will cost money. They will pass that money on to consumers."   Obama emphasizes that some of the costs will be offset by new "green jobs." Van Jones, Obama's Green Jobs czar was fired in September 2009, and the program lacks a spokesman.

How it works
In a "cap and trade system," a regulating authority (the government) sells permits to companies for the right to emit pollutants. The cost of the permits would be shared by consumers (through higher prices), the companies (through lower profits) and the economy (through inefficient misallocation of resources.) A company may emit pollutants up to the permitted amount (the "cap"). Companies have a financial incentive to restructure their operations to pollute less, so they can sell permits to other companies (the "trade" part).

Each source can design its own compliance strategy to meet the overall reduction requirement, including sale or purchase of allowances, installation of pollution controls, implementation of efficiency measures, among other options. Individual control requirements are not specified under a cap and trade program, but each emissions source must surrender allowances equal to its actual emissions in order to comply. Sources must also completely and accurately measure and report all emissions in a timely manner to guarantee that the overall cap is achieved.

Over time, the permits decrease the amount of pollution allowed, with the goal of reaching some set level of carbon emissions for an entire nation or region.

Drawbacks
As with any increased cost of business, the costs of emission permits are passed on to the consumer or the shareholders. For this reason, critics of cap and trade maintain the system amounts to a tax increase on the middle class and the poor.

Spain has a cap and trade program in place which led to 31% increases in the price of electricity and energy. Dr. Gabriel Calzada, a professor at Universidad Rey Juan Carlos in Madrid told reporters, "It has cost billions." Obama claims that part of his strategy will result in good paying 'green-jobs' but Calzada said for every green-job, 2.2 jobs in Spain were lost.

Necessity?
The biggest controversy over "cap and trade" is its motivation. The policy exists as a response to belief in man-made global warming. By presuming that global warming is caused entirely or mostly by human activity, it would follow that environmental benefits might ensue from regulating human carbon emissions. This belief has been endorsed by Al Gore, Barack Obama and John McCain, but many have serious doubts.

The primary fault with this belief is that global warming is caused by human activity. As explained in detail on the global warming article, it is far more likely that solar activity and natural climate variations explain any temperature fluctuations observed in recent decades. Furthermore, the average temperature of the world has been in decline for years, bringing into question the existence of global warming at all.

A secondary fault with the belief described above is in the efficacy of the cap and trade system. Even if global warming were proven to exist, and to be a man-made phenomenon, it is highly questionable whether "cap and trade" would have any effect other than to create an expensive and intrusive bureaucracy.