A Reporter’s Brief Guide to Cap-and-Trade

Cap-and-trade policies entered the environmental reporting lexicon in the early 1990s, when the United States established them as a strategy for reducing acid rain emissions. Now cap-and-trade is part of the national dialogue again, this time as a proposed strategy to slow climate change.

For reporters experienced or not, writing about such an abstract policy – it sounds more like the stock market than anything else – makes it necessary to review what it means and what it tries to accomplish.

Here are several essential points – and what people are saying about them – that will help reporters on all beats navigate the issue of cap-and-trade. Regardless of what some late-night comedians might say to show how little the public knows, cap-and-trade has nothing to do with baseball teams swapping players. It is based on emission limits (the “cap”) and economic incentives (the “trade”). And, therefore, it helps to think of the issue as if you’d been invited to be a TV pundit and explain it in 30 seconds. These six points should help.

1 In the United States, cap-and-trade is a suggested policy certain to attract continuing attention throughout the current Congress, and even more so under a new administration and new Congress starting in 2009.

Joe Lieberman, D-Conn John Warner, R-Va

Under this policy, the government would limit carbon dioxide emissions and allow companies to meet steadily tighter limits through a free-trade system of buying and selling permits to emit carbon dioxide. The leading legislative prospect currently before the U.S. Congress – sponsored by Senators Joe Lieberman (D-Conn) and John Warner (R-VA) – embodies this approach. Companies that emit greenhouse gases exceeding their caps could buy credits from companies that operate with fewer emissions and therefore have permits to sell.

“There’s a tendency out there to think it’s a lot more confusing than it actually is,” says Tony Kreindler, a climate specialist with Environmental Defense Fund, in its Washington, D.C., office. “It’s very simple. At the beginning of the year, the government issues a set amount of permits for carbon dioxide,” he says. “At the end of the year, if you don’t have enough permits to cover your emissions, you can buy those from people who emit less. And the cap declines every year, so that’s how you get your emissions reduction.”

EDF was a leading proponent of the cap-and-trade program established in the 1990s under the Clean Air Act for controlling sulfur dioxide and oxides of nitrogen, causes of acid rain, and the organization is again advocating for a cap-and-trade approach to reducing greenhouse gas emissions.

2 Cap-and-trade for carbon dioxide emissions is based on what many consider the substantial successes of that earlier application to controlling acid rain. That earlier program focused on cap-and-trade to reduce power plant sulfur dioxide emissions. Experts generally acknowledge that the acid rain precedent serves as a fruitful model for a carbon dioxide cap-and-trade system, but they acknowledge too that the latter will be more complicated, in particular because of the international nature of the sources and impacts and the desire to effect trades across international boundaries.

3 The U.S. has no cap-and-trade program for carbon dioxide emissions, which the Bush administration has resisted labeling a pollutant under the Clean Air Act. Many European countries have started such programs over the past several years as a result of their signing the Kyoto Protocol.

The European Union passed cap-and-trade legislation in 2003, began its emissions trading scheme two years later, and, in 2007, established a goal to reduce greenhouse gases by 20 percent by 2020. That percentage would be 30 percent if other developed countries in the world agreed to make emissions reductions. The European Union member countries are: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

4 Several U.S. states have adopted their own cap-and-trade policies. Three years ago, a group of northeastern states formed the Regional Greenhouse Gas Initiative to lower power plant emissions. Ten states have signed on: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. The program is to start in 2009, capping emissions at current levels and reducing them by 10 percent by 2019. States set aside 25 percent of the emissions allowances the program establishes, spending them on projects like renewable energy programs.

Power Plant Photo

The Western Climate Initiative, formed in 2007, currently includes Arizona, California, New Mexico, Oregon, Washington, Utah, Montana, and the Canadian provinces of Manitoba and British Columbia. They set a goal of cutting emissions to 15 percent below 2005 levels by 2020. By August, the western coalition plans to set up a cap-and-trade program to help them meet the target.

Other states have adopted goals for cap-and-trade, including Florida, New York, New Jersey, and Colorado, Kreindler says. Florida’s plans are “some of the most aggressive climate change proposals on the table,” he says.

In 2006, California adopted AB 32, the Global Warming Solutions Act. It caps emissions at 1990 levels by 2020 and may include a cap-and-trade program to meet the goal. It’s the only state program so far that caps all emissions from major industries and sets penalties for those not meeting standards. In a report about California, the Electric Power Research Institute found that all methods of reducing emissions would cost the state money, but that a market-based cap-and-trade system would cost the least.

A critical question facing federal and state policy makers as they proceed with plans for controlling greenhouse gas emissions will be the relationship between existing state and regional efforts and any new federal system. State leaders and policy makers in Washington are expected to work closely to coordinate on a wide range of federal/state preemption or supremacy issues.

5 Proponents argue that cap-and-trade is the most credible way to slow greenhouse gas emissions and the rate of climate change. In a “Cap and Trade 101” report on the subject, the Pew Center on Global Climate Change and the Pew Center on the States write that trading emission allowances makes it possible for different companies or utilities to spend less – individually and collectively – on lowering greenhouse gas emissions in the world.

“For some emitters, implementing new, low-emitting technologies may be relatively inexpensive,” the report says. “Those firms will either buy fewer allowances or sell their surplus allowances to firms that face higher emission control costs. Since a ton of carbon dioxide emitted from one source has the same warming effect as a ton emitted from any other, the location of a given emissions reduction does not matter.”

In a chart, the Pew centers estimate that a hypothetical company and a hypothetical power plant would spend less on reducing their total emissions if they are allowed to trade credits rather than requiring that each meet a specific reduction requirement.

EDF’s Kreindler argues that cap-and-trade is the preferred strategy for reducing greenhouse gas emissions. “Voluntary emissions don’t guarantee emissions reductions. A carbon tax doesn’t guarantee reductions [in emissions] – it’s up in the air.”

6 Some critics of a cap-and-trade strategy favor carbon taxes for reducing greenhouse gas emissions.

Charles Komanoff and Daniel Rosenblum, founders of the New York City-based Carbon Tax Center, write in their blog that although the existing cap-and-trade system has helped control costs in reducing acid rain emissions, there are problems with a CO2 strategy applied more broadly.

“The scale of a carbon trading system – it would be up to 100 times larger than that for sulfur – combined with the lack of readily available ‘technical fixes’ for filtering or capturing CO2, appear to rule out the sulfur cap-and-trade system as a model for carbon,” they write.

Laurie Williams and Allan Zabel, EPA lawyers expressing their own personal judgments, have written an open letter to the U.S. Congress against cap-and-trade and in favor of carbon fees. “A cap-and-trade system without accurate verification of emissions is an invitation to fraud and would significantly delay reductions,” they write. “While it is possible to require accurate greenhouse gas reporting from large industrial facilities and electrical generators, there are many other sectors of the economy from which it will be difficult or impossible to insure accurate reporting.”

An additional resource addressing cap-and-trade, beyond those mentioned above, is the Environmental Protection agency web site.

Christine Woodside

Christine Woodside is a freelance writer living in Deep River, Connecticut. Twitter: @chriswoodside)
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