Emissions trading primer (aka carbon cap and trade)

This article is in response to a reader’s question that simply stated “In 500 words or less, what the heck is carbon cap and trade? I start trying to learn about it and wind up totally confused!”

I can certainly sympathize. I’m still at a point where I don’t know if it’s a good thing or not. At face value, it doesn’t sound like a bad idea – but when the ifs, buts and what abouts get thrown in, my mind starts to wander.

So let’s take the “face value” approach; the basic concept.

At its simplest, carbon cap and trade, also known as emissions trading, is meant to be a way to control carbon emissions through financial mechanisms – basically whacking a cost on pollution.

The idea is a government sets a figure as the amount of “allowable” carbon pollution for the country. It issues companies with credits or allowances that basically state they can generate X amount of emissions. Over and above that, it starts costing them money. In some models, there are no freebies or allowances – all carbon pollution must be paid for.

Bearing in mind there are all sorts of variations and assuming allowances are handed out to industries, we’ll use some really simple numbers to illustrate how it’s meant to work.

Company X and Y are in the flomble industry, both generate around the same sales figures and have the same sort of production levels.

The government has decided to implement cap and trade and all companies producing flombles of a certain size are allowed to emit 10 tons of carbon dioxide a year.

Company X emits 8 tons a year
Company Y emits 12 tons a year

Company X has two tons of extra carbon credits, so they can choose to get sloppy in their production methods or they can sell those extra credits.

Company Y, which exceeds the maximum amount of “allowable” carbon emissions has two choices – either improve production methods to decrease emissions, or to buy Company X’s (or another source’s) surplus credits so they can continue operating in a business as usual way.

So where does the reduction come in, where is the progress – just buy the couple of tons worth of credits and everything is groovy isn’t it?

Not really, if company Y has to buy credits, that affects their bottom line. Either they take a cut in profits, or they jack up their prices. However, company X doesn’t have to increase their prices, in fact, they are making more money through the cash they made from selling their surplus credits to company Y. They might even choose to lower their prices.

Suddenly Company X has a big edge over company Y. Company Y then might think about ways they can cheaply reduce their carbon emissions so they are back on an equal or better footing with company X.

The other aspect of a carbon cap and trade arrangement is that at regular intervals the cap is lowered. Next year, the cap might be 9 tons for flomble makers, a couple of years after that, 7 tons. Not even company X can rest on its laurels – it needs to continuing refining and cutting emissions to stay ahead of the curve.

How about?
What if?
Oooh look, a butterfly!

… if any of those words are springing to your mind, congratulations, join the many of us sharing the same thoughts. It’s a very hard concept to form an informed opinion on as it starts getting really complex from that point on.

In staying in my promise to deliver the primer on carbon cap and trade in fewer than 500 words, I better stop; which is a good thing because this is about as much as I really understand ;). No, you can’t include the introduction in the word count. Or this paragraph. Or the ones to follow.

If a referendum were held tomorrow and the question was, “Do you support carbon cap and trade”, I certainly hope there is a “not sure” box to tick!

Other mechanisms

One of the reasons carbon cap and trade is so complex is to avoid the alternative strategy – the “t” word so unpopular with voters. Tax. Wouldn’t a carbon tax be a whole lot simpler? Perhaps, there are many who think it would be. A tax on carbon emissions *may* encourage companies to decrease their emissions to get an edge over their competitors. The revenue could be used to repair damage done and to provide more support to green industries.

Countries such as India are just considering whacking a tax on every tonne of coal (so called “clean coal” or not) and using that revenue purely to bolster renewable energy in the form of grants, rebates and other incentives. Aside from the direct support, making coal more expensive makes renewable energy more competitive.

Bear in mind too that renewable energy needs the subsidies as fossil fuels are still so heavily subsidized in many countries. Some might say it would be simpler just to remove the fossil fuel subsidies.

Carbon cap and trade systems, carbon taxes, emissions trading systems and carbon taxes are very, very hot political potatoes and certainly don’t capture the public’s imagination like direct support for solar power does. If your country is in the throes of attempting to introduce an emissions trading scheme, don’t hold your breath – powerful forces are at war and its likely whatever is introduced will be diluted to pacify the opposition in order to allow it through.

It comes back to the point that we cannot wait for government to provide all the answers to environmental degradation and climate change. There are so many things we can do in the form of personal actions in the meantime to lessen our own carbon footprint. You could start today with these electricity saving tips, reducing your food miles, saving gas or any of the many other tips you’ll find on this site. The good news is, many of the tips will save you money!