The Strengths of Cap and Trade

This week we will examine some of the strengths of the implementation of a cap and trade system.
* A cap and trade system is economically efficient. Unlike a government mandate to clean up industry or a tax leveled at all companies, cap and trade can have the same effect of forcing cleanup but gives companies a choice: either clean up or pay. This is more efficient than leveling the same standards at all polluters because companies who have the ability to clean up without too much cost can do so; the companies that would suffer greatly from changing their practices can choose to pay for pollution permits and sustain their levels of pollution. In the language of Econ 101, the cap and trade system basically makes the right to pollute a scarce resource because there are a limited number of permits based on the cap. The system of allocation of this scarce resource gives companies a choice and this is more efficient than demanding the same behavior of all companies.

* Companies are also given the choice on how to clean up. Will they produce less? Invent a new clean technology? Import technology to improve their system? Use different chemicals? The company has the freedom to decide the methods by which they reduce their pollution should they choose to do so. (For more on this see this Washington Post article )

* This is a business-minded solution. Cap and trade creates a market and allows businesses to interact as they are accustomed to doing. Many companies, from Nike to General Motors have endorsed the American Clean Energy & Security Act of 2009. This is indicative of the fact that cap and trade is a realistic method for companies to adopt.

* Cap and trade is not a short-term, one-time fix like a simple emissions cap or enforcing the cleanup of a river. The system will keep reducing pollution by lowering the emissions cap (reducing the number of permits that can be traded) over time. Therefore the system can fluctuate if necessary and has the capacity to continue to improve environmental quality.

Some who oppose the cap and trade system worry that putting a price on pollution and therefore the environment is a slippery slope (See Greenpeace's argument against cap and trade.) I think compromises must be made. Pollution can be treated as a normal good and though many of us consider the environment priceless, realistically no government, person, company, or organization is willing to spend infinite funds on it, so imposing a price tag may make some sense.
Others fear that cap and trade will cause energy costs to increase and lead to job loss. That's why some labor groups oppose the Clean Energy and Security Act. I'll let our bloggers next week delve into this issue further, but in defense of the measure I must argue that if some businesses suffer-- and therefore jobs disappear-- it may be necessary. America is already behind many other countries that have invested in producing more efficient cars, for example. By trying to salvage our dying industries instead of investing in up-and-coming, more environmentally friendly ones, we only shoot ourselves in the foot. Cap and trade will likely increase energy costs and may lead to job losses in dirty industries. But this is a short-term price America should pay to mitigate the long-term costs of climate change, and these problems may even lead to positive consequences like the fortification of clean jobs and the reduction of energy use.

One revision to the current cap and trade proposal I must advocate is to charge companies for the permits. Maybe the reason so many companies endorse the 2009 bill is because most of the permits would be given away at no cost to companies. Polluters should pay for the damage they afflict on the environment and people.

Overall cap and trade is a simple, business-minded, realistic solution with the potential for very important improvements in environmental pollution. It should be taken seriously. Though the idea of organizing such a scheme may seem daunting, it has been implemented in the European Union, so we know it can be done. Not only that, but dealing with cap and trade is a whole lot easier than dealing with the far-reaching and profound problems that may assault us if we don't act quickly with measures like this one.

-Morgan Flake