The cap in cap-and-trade is no cap at all

Something most cap and trade proponents don’t seem to get: The cap isn’t really a cap at all.

While the cap in cap-and-trade is entirely virtual, realized only through pricing or administrative actions like penalties, the concrete image of a placing a physical object like a cap over emissions reassures that there is a limit to emissions somewhere. Yet without both a price for emissions and some pretty daunting penalties, the cap hovers in the air without any foundation at all; it remains simply a well-meaning “climate pledge.”

There is no more certainty in emission levels from a cap and trade system then from a carbon tax, unless one implements draconian penalties for emitting without a permit. Given that no one is willing to do such a thing the cap becomes little more than a well-meaning climate pledge. It certainly isn’t a cap, at least not by any normal definition of the term.

4 thoughts on “The cap in cap-and-trade is no cap at all

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  1. This is a silly and factually incorrect argument.

    Enforcement is the exact same under either a carbon tax or a cap-and-trade system. Think about it: either way the emitter is simplying buying a piece of paper from the government that gives them the legal right to emit greenhouse gases–but neither system works unless you enforce it.

    None of this has to do with the fundamental difference between a carbon tax and cap-and-trade.

    Under a carbon tax governments set the price of emitting GHGs and allow the quantity to be determined by the market–i.e. at a price of $20 X number people will emit Y quantity of GHG, at $40 the amount will be less.

    Under a cap-and-trade system governments set the total quantity of GHGs that can be emitted and allow the price to be determined by the market–we issue 700 Mt of permits and that results in a price of P dollars per permit.

    Since we want to lower emissions to a certain total level–rather than impose a certain predetermined price–it makes far more sense to adopt a cap-and-trade policy.

    Supporters of the carbon tax generally support it because its name somehow sounds tougher. Well, its name is also less popular, so let’s just get on with the less strongly opposed and smarter solution.

  2. Caps or cap and trade are both vulnerable to an enormous amount of chicanery. I much prefer the approach made possible by recent studies showing that our atmosphere’s remaining carbon carrying capacity is half a trillion tonnes or slightly less. In other words, nations will have to allocate that half trillion tonnes among themselves knowing that it constitues the maximum emissions capacity if we’re to stay within the 2-degree target. That would, of course, cause each nation to have to justify its share of that pie, unless we were to allocate it on some other means such as a per capita quota (which would pretty much shut down the industrialized nations).

    We have to find some equitable way for all nations to live within the planet’s carrying capacity which means achieving a meaningful consensus. I can’t see how that can be done on a state by state basis with each determining percentage reductions or limits. We have to have a deal and that means we have to begin discussing absolute quotas, not targets.

  3. @RayK

    Yes there are enforcement issues with both systems, but generally the relative simplicity of a carbon tax is seen as making it more difficult to abuse, though Paul Krugman notably disagrees (I am writing a post in regards to this), but that isn’t really the point.

    The point is what exactly the cap in cap and trade means. As I said in the post, unless we are willing to impose and enforce some draconian penalties for emitting without a permit, the cap becomes little more than a well meaning climate pledge.

    Remember the final price for a carbon permit will never exceed the price of the penalty for emitting without a permit. If the penalty for emitting without a permit is $100 per ton (and that is likely much higher than we are likely to see any time soon) then no one will pay more than that for a permit. This limit on price (sometimes called a safety valve) means that it is very likely that the total number of emissions will likely be higher than the cap. Add in offsets and emissions will be even higher.

    So as I said in my post the cap isn’t a cap, at least not by any normal definition of the term.

    Oh and the reason people, like myself, prefer carbon taxes isn’t because they sound tougher, it is because it seems a far simpler (if done right) way to put a price on carbon.

    @ MoS

    That would be an interesting approach, but I simply can’t see the worlds leaders being able to arrive at such an agreement. Perhaps I am too cynical; I would love to be proven wrong on this

  4. The devil is in the details, with any carbon reduction scheme.

    ScruffyDan is exactly right though: the caps being considered are not caps on the total Carbon Dioxide entering the atmosphere. For one, the caps are only on anthropegenic sources, and secondly, they are only going to be upon certain subsets of man made emissions that can be measured and attributed to individual sources, likely large point sources.

    So aside from the huge enforcement and measurement issues under the cap, as with carbon taxes, it isn’t, by the commonly understood definition, a “cap”.

    And the enforcement and measurement issues under a cap and trade system are many. How do you measure emissions? How many permits do you auction? How do you stabilize the market, to prevent the cost of emissions permits from rising too high, or falling too low, or fluctuating too wildly? For large scale sources, it would be cost-effective to track emissions, and for those companies to buy and sell emission allowances is larger blocks. But for smaller emissions sources, or non-point source emissions, or for small enterprises, it is really difficult and costly, potentially, to individually measure emissions, or buy and sell small numbers of credits. Here, for small businesses, carbon taxes on fuel inputs, or on levels of certain industrial processes, would be a better method of costing in carbon dioxide emissions, in my opinion.

    So some combination of carbon taxes and cap and trade would likely be the best. (And this is exactly what British Columbia is presently developing. Caps for large emitters. Taxes for small emitters and individual carbon consumers. Rebates to avoid double taxation for certain businesses.)

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