Costs and Benefits of a Cap and Trade System

Assuming, as a vast majority of scientists do, that Global Warming is real, and is caused by greenhouse gas pollution chiefly in the form of carbon dioxide (CO2), the next step is figuring out how to tackle this problem in an effective way, while accurately reflecting the cost of this pollution on society. Many ideas have been offered, from a carbon tax, carbon offsets, to letting the market naturally take care of the problem. One recent idea that has gained momentum is implementing a cap and trade system. A cap and trade system would build a strong framework for addressing the costs of greenhouse gas emissions and allow for the Government to set standards to bring these emissions under control, but it's the costs and benefits of such a program are the chief point of contention.

Currently, polluters pay almost no private costs when emitting greenhouse gas (GHG) emissions. Utilities that operate Coal-fired power plants, the largest source of GHG in the United States, are heavily in what they are allowed to charge consumers, but GHG emissions are not factored into theses costs. 1 The emissions are externalities, and the social costs are increasingly placed on society. Though direct causation is difficult to prove due to the complexity of climate interactions, recent phenomenon such as the devastating flooding in Iowa, Hurricane Katrina, record drought in the Southwest, and springtime blizzards in the Great Plains, all of which place a large burden on Government services, may be attributable to Global Warming. The main argument for a cap and trade system is that these social costs will only increase over time, to the point where they will exceed the social costs and externalities of a cap and trade system.

A cap and trade system works as follows. A cap would be placed limiting the total amount of GHG emissions from regulated industries. Allowances would then be distributed, either by an auction, as favored by many environmentalist organizations, or through free allocation, as advocated by many business groups. Once distributed, allowances, or permits, could be traded on a regulated carbon market, which would allow those who reduce their emissions to sell their permits for profit to those who have not reduced their emissions. The cap would be reduced over time to meet the emissions goals of regulators, in a way that would allow time for the market to adapt and phase out the use of GHGs.

Opponents of a cap and auction system argue that the costs of cap and auction, which could result in the rise of carbon based energy sources, such as gasoline or coal-generated electricity, would hurt the economy, and result in job losses, rising unemployment, and increased outsourcing of jobs to countries without similar environmental controls, such as China or India.

Obviously, the main dispute is around cost - proponents argue that the costs of not tackling GHG emissions is far greater than the costs of a cap and auction system, while opponents argue that the costs of a cap and auction system are too high for our economic well-being. It will be up to science - positive, factual scientific analysis - to determine which side is right. Most - but not all - scientists agree that unchecked GHG emissions will cause devastating effects, including rising sea-levels that would result in millions of people having to relocate here in the United States, with far worse effects in low lying countries like Bangladesh.2 The long-term risks to global society potentially far outweigh the short term costs to our economy. A cap and trade system would also have the added benefit of helping foster next-generation energy technology, allowing the United States to catch-up and eventually become a leader in clean energy technology. Though there are still many issues that need to worked out, a cap and trade system would be helpful in addressing our growing Global Warming crisis through economic means.