Tag Archives: cap and trade

Controlling Carbon

The United States is responsible for over 20 % of the world’s greenhouse gas emissions, essentially Carbon Dioxide. Our 6 billion tons produced annually comes from electricity generation, transportation, and commercial uses of fossil fuels. There are numerous strategies to reduce carbon emissions, the simplest being energy efficiency and the substitution of wind and solar power for burning fossil fuels. Regulatory actions to reduce carbon emissions can take several forms.

Carbon emissions can be regulated via a tax. If energy production by burning coal, oil and natural gas becomes more expensive, use of carbon-free energy production will be favored. This is basically a national sales tax on carbon usage. The tax rate on carbon for the desired reduction of carbon emissions is adjustable, raising the tax rate would lower carbon emissions. The income generated from the tax could be used to increase energy efficiency via subsidies, thus lowering costs. Increased transportation costs could be at least partially offset through infrastructure improvements.

Rather than use the income from a carbon tax for public works, the tax could become revenue neutral with a fee and dividend approach. The increased cost of energy to consumers could be offset by an equivalent reduction in income taxes. A negative income tax would ensure that the poor aren’t disproportionately impacted. Alternately the income could be put in a trust fund which then would be returned directly to consumers via a monthly dividend.

Yet another approach to regulating carbon emissions is cap and trade. Basically, the government sets a maximum level of carbon emissions, the cap, then issues permits to emitting industries. The emission permits could be traded on an exchange. If company A wants to expand an emitting activity, they would have to go to the marketplace and buy additional permits. Company B could profit from increased efficiency by selling their unneeded emission permits. Total carbon emissions would be lowered as the maximum emission cap is reduced.

Both a cap and trade mechanism and a carbon tax can be an effective way of lowering carbon emissions as long as they provide a clear economic incentive to reduce reliance on fossil fuels. Of the two cap and trade is more complex in its implementation but can better ensure target emission reductions are met.

For cap and trade, the costs are a little murky because that is determined by the trading market.
Carbon taxes are the opposite. The cost is clear but the amount of emissions reduction is iffy.

Some will argue that the government should not be picking winners and losers. This would be a fair argument except not including the external costs of burning fossil fuels gives it an advantage over cleaner alternatives. Added costs to burning fossil fuels can be thought of as a mechanism to include those costs and level the playing field.

The chance of doing anything to slow the train wreck of global warming seems unlikely with the current administration. In fact, just the opposite is occurring. Trump has stated his desire to undo many policies put in place by previous administrations such as fuel efficiency standards, the energy star rating system and President Obama’s clean power plan.