Cap and Trade leaks

Talking points for carbon fee and dividend.

Here are some problems with Cap and Trade.

  1. Cap and Trade leaks. That is it’s not inclusive, it doesn’t get all the CO2. You can see that right now in California. AB32 goes after only the big emitters. Sure, as the cap comes down AB32 will go after more sources, but it’s a top-down control system that will always be playing catch-up – trying to identify who out there hasn’t yet been absorbed by emissions accounting. CFAD is the opposite because the price gets assessed upstream, so there’s no need for CO2 police downstream. The price is what it is, everybody is included, and the market adjusts without external motivation.
  1. The free-rider problem. This is a big deal if the objective is to reduce planet-wide CO2 emissions. Cap and Trade has no mechanism to enforce caps outside national borders (other than something like Kyoto which didn’t work). i.e. one can’t actually command China what cap to levy. So a lot of countries will claim concern about climate change but won’t do anything about it because it’ll be cheaper not to. That means only a few countries shoulder the climate-cost burden.

Whereas the border tariff adjustments in CFAD are like dues in a club membership. “You can join our cool club and get preferred nation trading status (no tariffs), but only if you implement an equivalent kind of carbon fee as we have. If you decline, that’s okay, but understand that your exports to our country will get assessed a tariff equal to the carbon fee that you should have levied.” i.e. their exported products will not be cheaper in the US market, and the US gov’t gets enriched by the tariffs it collects. It’s in the exporters’ self-interest to install their own carbon-pricing scheme. No one has to force them. In this way CFAD will propagate around the planet.

A border tariff can be applied with a Cap and Trade system too, but it’s more complicated. How do you equate a “cap” with a tariff value? If you check the market price it’ll change constantly – what gets assigned as the tariff?

  1. There are many more issues
    1. Cap and Trade is a lot more expensive to operate than collecting an upstream tax on just a few thousand corporations.
    2. The Pope implied in his Encyclical that offsets are almost fraudulent. (They certainly are a source of scams.)

The big thing that Cap and Trade has going for it are the permits. They are tradable and hence acquire value. That can mean big bucks for polluting companies (especially when offsets are involved) and it can mean even bigger bucks if they scam the system (which many are likely to do).

– Rob Haw 15/07/12, rev 15/12/13


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