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The
debate is over
Challenges to the Economic
Approach:
The Case for Market
Intervention
Free Market Strategies
Carbon
Taxes
Emissions
trading: Cap and Trade
-Setting
the Cap
-How
are they distributed?
-Case
Study: SO2 emissions
-Case
Study: Kyoto Protocol
Economic Adaptation
Further
Information
Comments & questions to:
awerth@macalester.edu
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Emissions trading: Cap and Trade
Cap and trade is an emissions trading scheme where
the total allowable amount is capped, permits are issued and then can
be traded freely . The most important aspect of emissions trading
is that it limits the total amount of emissions and lets the market
decide where and how the reductions occur. Emissions trading
schemes can therefore easily be attached to a politically determined
emissions reduction plan. Emissions trading are not new; it was
used in the 1980s to phase out leaded gas and CFC’s . They also
has a very high level of flexibility. In many ways they are like
stocks because each permit carries the right to emit a certain amount
of carbon dioxide and this can be traded. A limited amount of
permits are issued, but they can be traded after that or bought in one
year and used in another. The advantage to permits is that they
work like many other markets today and have high flexibility.
Setting the Cap
Setting a good cap for total emissions is critical
for an efficient outcome. While setting the cap on carbon
emissions is an issue of scientific and political decisions, as well as
economic, permit trading fits easily with set goals. A carbon
tax, on the other hand, must rely on market analyses to determine
appropriate pricing and would need to be adjusted many times.
Emissions permit systems, however, lose momentum when they go beyond
their goals for emissions reduction. If emission reductions are
made beyond the target, the price of permits will drop, decreasing the
economic incentives to continue reducing. Carbon taxes do not
suffer from this weakness since they offer a continuous incentive to
reduce emissions.
How are they distributed?
A major contention point with emissions trading
schemes is the determination of who gets them and how they are
distributed. In a fully free market, emissions permits would be
auctioned off to all emitters. However, this is often not the
case. Preferential treatment of different permit buyers can mean
that some companies can have early access to permits before
others. This system runs the risk of rewarding companies for
their “connections” and not their emission reductions, as was
originally intended. So far, permits have not been auctioned, but
rationed out for free based on past emissions. This allows for an
easier transition to the trading market, after which the number of
permits decreases to create reductions. This system of
“grandfathering” permits can penalize companies who have already made
emissions reductions in the past. If a company is highly
inefficient, making significant cuts is easy at first, but as cuts
increase, the cost increases for comparable reductions. If a
company has been responsible in the past and then is transitioned to a
permit system, it will not recognize or reward past actions and make it
relatively harder for that company in the future.
Case Study: SO2 Emissions
"it would be
imprudent to forget how lengthy and heated the national dialogue was
over capping SO2 emissions, allocating allowances, and adopting a
market based approach. "
S02 emissions trading program grew out of growing
concerns over acid rain and was implemented under a section of the
Clean Air Act amendments in 1990. The system concerned itself
with the worst offenders; over 100 coal burning power plants all over
the country. The system was implemented in two phases, after
first including the initial plants, in included an opt-in clause that
would allow other emitters of SO2 to join in the trading market.
The market freely allocated permits and allowed for trade.
Trading took a while to occur and at its highest, only 2.7% of permits
were traded and many of them within companies. However, the
system was largely a success and indicated a greater than expected
decrease in costs to decrease emissions. Significant effort went
into implementing the system and with great opposition. In the
end, the political will to address the problem pushed its
implementation and the evidence indicates that it allowed for
reductions at much lower cost than a law might have.
"Despite these and
other uncertainties, market-based instruments for environmental
protection-and, in particular, tradeable permit systems-now enjoy
proven successes in reducing pollution at low cost.” -Robert N. Stavins
Case Study: Kyoto Protocol
"the Kyoto Protocol, a deeply flawed agreement that manages to be both
economically inefficient and politically impractical."
"In March 2001 the
U.S. under President Bush declared its withdrawal from the Protocol,
reasoning that the costs to the U.S. economy would be too high and
exemption of developing countries from binding emission targets would
not be acceptable"
The Kyoto Protocol is a program originating from a
series of international conferences that created emissions targets for
developed countries. It entered into force in 2005 with the entry
of Russia into the scheme and began to work towards its goal of
reducing total emissions 5% below 1990 emissions by 2012. Kyoto
has been highly criticized by those who believe it has gone too far,
not enough or that it is just plain impractical. Emissions
targets vary by country and have been criticized for being little more
than arbitrary numbers related to politics. The trading scheme is
grandfathered based on emissions in 1990 and creates some strange
situations. For example, Russia, which suffered from an economic
collapse since 1990 has a huge excess of permits to sell, effectively
being rewarded, even though they made conscious effort to reduce
emissions. Because of this and many other reasons, the Kyoto
protocol has been contentious for years. The fact that the
protocol excludes developing countries, has been the stated reason why
the George W. Bush has refused to sign it. The protocol, however,
is a product of the political processes that created it. It is
symbolically important because it is the first agreement of its kind,
but it also indicates that many countries do not yet take the problem
of global warming seriously.
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Last updated: 2/2/2006
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