Emissions Trading As Policy

Bloomberg reported that several US states and provinces in Canada are joining forces to create a cap and trade program throughout North America. A program already exists in California with plans for Quebec and Ontario to join it, and an initiative in the northeast led by New York has several new interested states and could possibly join with California’s in the future. This is in spite of the fact that the Trump administration has expressed a desire to remove many pollution controls and ease restrictions on emitters.

photo-power-plant.jpg
Source: https://www.gsb.stanford.edu/insights/what-would-it-really-cost-reduce-carbon-emissions

As we know, emissions trading as policy can be an effective tool to reduce pollution. Using market mechanisms, government and financially incentivize companies to emit less. In simple terms, the government places a cap on emissions and distributes “credits” that allow companies to emit. The government allows companies to buy and sell these credits on the open market. What this should mean is that companies that able to efficiently and cheaply reduce emissions will have a financial incentive to do so, and sell any extra credits they have to companies who cannot as cheaply reduce emissions. The government will have essentially created a new market, one which results in lower overall emissions. Depending on the type of emissions and the location of the program, the government has a number of options for implementing the program. The government can also calculate the proper level of overall emissions that maximizes efficiency while minimizing social cost.

On an international level, parties that have signed onto the Kyoto protocol may trade units to other countries that need additional units. However, since not all nations (most significantly and notably the United States) participate in the carbon market internationally, the markets aren’t as efficient or effective as they could be. Though emissions rates are slightly falling in the US, under the Paris Accord emissions rates should be falling faster to avoid the worst impacts from climate change. So several states have taken the solution into their own hands and have begun creating emissions trading locally.

GlobalCarbonBudget_5.png
Source: https://www.carbonbrief.org/what-global-co2-emissions-2016-mean-climate-change

 

California’s cap and trade program began in 2013. The state hands out or auctions off emissions permits. If a company needs more, they may purchase them. This program, among other things, is part of an ambitious goal to cut emissions in California to 40% below 1990 levels by 2030. Since Donald Trump was elected president and withdrew from the Paris accords, California has announced it will strengthen the program. One challenge is showing directly how the program is reducing emissions, and the state issues reports that show emissions levels. One report showed emissions at the companies under the program fell 4% in two years.

In the Northeast, the Regional Greenhouse Gas Initiative (RGGI) unites 9 states in creating an emissions market. Each state has enacted legislation that creates the program in each state statutorily, and tracks emissions from each state. Credits may be traded across state lines. It was reported in Bloomberg that Virginia and Pennsylvania have expressed interest in joining, further expanding the market. If the California market joined with Quebec and Ontario to unite with the RGGI, the market would expand across a huge portion of North America’s economy. It may also boost interest in a national plan.

RGGI
Power sector emissions v. GDP in the area covered by RGGI region (Source: RGGI)

Meanwhile, on the federal level, legislators have not given up all hope. Two Democrats in the senate hope to enact legislation that would create a carbon tax, $49 per ton. Though not the same as a cap and trade, the legislators feel this has possible bipartisan appeal. The money earned from the tax would be used to fund a large tax cut on corporations, thereby possibly obtaining conservative support. Another criticism of the effort is the increase in energy prices that would be passed onto the consumer. This effort is still largely considered a long shot.

The pushback against the federal government’s effort to fight emissions reductions has united several states in an effort to reduce overall emissions. This effort is not only crossing state lines, but international lines with Canadian provinces. These policies, in combination with other efforts to reduce emissions, may indeed counteract or pressure the federal government into action on reducing emissions.

By Carl Wojciechowski

  1. Martin, Chris, and Joe Ryan. “Cap-and-Trade Is Catching On in the Trump Era.” com, Bloomberg, 20 Sept. 2017, www.bloomberg.com/news/articles/2017-09-20/state-efforts-boost-cap-and-trade-as-trump-pushes-for-more-coal.
  2. United Nations Framework Convention on Climate Change. Emissions Trading, United Nations, 1 Feb. 2013, unfccc.int/kyoto_protocol/mechanisms/emissions_trading/items/2731.php
  3. Fehrenbacher, Katie. “Climate Goals: inside California’s Effort to Overhaul Its Ambitious Emissions Plan.” The Guardian, Guardian News and Media, 20 June 2017, theguardian.com/sustainable-business/2017/jun/20/california-climate-change-emissions-program-cap-trade.
  4. https://www.rggi.org/design/overview
  5. Friedman, Lisa. “Some Democrats See Tax Overhaul as a Path to Taxing Carbon.” The New York Times, The New York Times, 17 Aug. 2017, http://www.nytimes.com/2017/08/17/climate/carbon-tax-reform-climate-change.html?rref=collection%2Ftimestopic%2FCap%2Band%2BTrade.
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