What is Carbon Cap and Trade? In the US? In Europe? Part 2

What is carbon cap and trade in the US? In a previous post, Carbon Cap and Trade in Europe and the USA  was introduced using the metaphor of a pizza. Basically, there are finite number of slices (carbon credits) to go around to people (companies) and if they need more food (energy), they must pay (trade) for more slices. Also in the previous post the European Union's leadership in carbon cap and trade was examined briefly in its three phases. Carbon cap and trade, which originated in the USA, is the most viable solution to carbon emissions reduction. Cap and trade in the US in the past has had very surprisingly successful results.

Carbon cap and trade was created in the USA. It all began with concern over acid rain caused by factories and power plants emitting sulfur dioxide. The concern over acid rain first began in 1970 and the practice of cap and trade for sulfur dioxide did not begin until 1990, about a 20 year turnaround (T.J. Glauthier, 2009). Since the sulfur dioxide cap and trade initiative began, sulfur dioxide emission into the atmosphere decreased by 50%, compliance costs turned out to be 50% as previously estimated, and rate increases passed on to end-users went up by only a few percent. If concern over climate change first began around 1988, it seems likely history will follow a similar 20 year cycle. As more US citizens mature to the consequences of climate change they'll demand solutions and demand cap and trade.

Every solution has its pros and cons, although at this point letting go of the perfect solution in exchange for rapid and cheaper mitigation may still be the best way out. In their book, Energy Shift (2009), Eric Spiegel and Neil McArthur reveal a Booz & Company "carbon war game" exercise carried out amongst seven major investor-owned utilities in the US. The results show that restrictions on carbon emissions would drive up electricity prices 5% year after year for 10 years (to clarify further, if your electric bill was $100 the first year, with 5% rate increase year after year, on the tenth year you'd be paying $171 for the same box of electrons). Spiegel and McArthur put it best: "Increases at that magnitude would set off a political firestorm."

Despite these supposed costs, the benefits of cap and trade are many. Without cap and trade, coal demand will rise 1.9% annually through 2030; with cap and trade demand for coal will drop 2.2% annually (Spiegel & McArthur, 2009). A carbon price set at $30-$40 per ton of carbon emitted would increase the cost to operate a 500 Megawatt by 70%; at this rate it the costs are the same to install CCS technology or invest into a new renewable energy plant altogether. All good ideas to solve climate change.

Other popular alternatives include direct legislation and direct taxation of carbon. Both are unlikely in the US as direct legislation is unimaginable; a government takeover of all the utilities companies sounds as difficult as a government takeover of healthcare. A direct carbon tax would have the same effect as cap and trade, but proposing an increase in taxes is political suicide for any party. Indeed, cap and trade in the US remains the best solution against climate change, here and in Europe.

Photo Credit: heatingoil<div xmlns:cc="http://creativecommons.org/ns#" about="http://www.flickr.com/photos/heatingoil/3855307407/"><a rel="cc:attributionURL" href="http://www.flickr.com/photos/heatingoil/">http://www.flickr.com/photos/heatingoil/</a> / <a rel="license" href="http://creativecommons.org/licenses/by-nc-sa/2.0/">CC BY-NC-SA 2.0</a></div>