[ Map depicting the status of regional, national and subnational carbon pricing initiatives. Image courtesy of Center for Climate and Energy Solutions.]
Introduction
In response to the impending threat of climate change, governments have begun to explore options for regulating greenhouse gas emissions. One of these options is an emissions trading program called cap-and-trade. Cap-and-trade programs are market-based regulations on greenhouse gas emissions, especially carbon dioxide. They contain two main features. The first is a “cap” set by government regulators that establishes the maximum level of emissions and becomes more strict over time. The second main feature is the allocation of emission allowances to emitters through tradable permits, which allows individual emitters to buy and sell allowances in order to comply with emissions caps. Cap-and-trade programs incentivize firms to operate below their emissions cap, because excess allowances can be sold at a profit to other emitters. These policies also add a layer of enforceability and accountability to corporate environmental protection.
Cap-and-Trade Programs in the US
Although there is no national cap-and-trade program in the US today, there are several state-level and interstate programs worth noting. Support for cap-and-trade programs is highest in the Northeast and the Pacific Coast, which are the only regions of the country where emissions trading systems have been implemented.
The Regional Greenhouse Gas Initiative (RGGI), the first US program, was established in 2005 and is now active in eleven states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia. The RGGI has gradually attracted more states to become signatories and has been effective in reducing emissions and generating state revenue. Between 2006 and 2018, the RGGI led to a 48% decrease in emissions among plants that were under regulation. From 2009–2017, the initiative generated $4.7 billion of state revenue from allowance auctions.
Three states have their own cap-and-trade programs. California was the first state to implement an emissions trading system in 2012. The program enforces caps on approximately 85% of greenhouse gas emissions in the state. So far, decreases in emissions have been on track with the program’s climate goals, and both enforcement and compliance have been strong, with 100% of companies meeting compliance requirements. In 2021, Washington State passed the Climate Commitment Act which includes a “cap-and-invest” program among other features. “Cap and invest” programs extend upon cap-and-trades by allocating proceeds made by permit auctions to finance other climate resiliency projects. Most recently, Oregon adopted the Climate Protection Program in 2021 that included cap-and-trade measures upon fuel suppliers as part of an executive order by the Governor.
Cap-and-Trades in Other OECD Nations
Other nations in the Organization for Economic Cooperation and Development (OECD) have also adopted cap-and-trade policies. The European Union’s Emissions Trading System (ETS) is a unique case of a multi-national program that encompasses both EU States as well as some other European countries. This system covers around 41% of greenhouse gas emissions in the EU including those from power plants, energy-intensive industries, and civil aviation. Other individual countries that have implemented cap-and-trade policies are Australia, New Zealand, South Korea, Quebec and some cities and provinces in China while the country works towards a national standard.
Arguments For Cap-and-Trade
When designed with proper monitoring and enforcement measures, cap-and-trade programs have proven to be environmentally and cost effective. While cap-and-trades largely focus on carbon emissions today, prior initiatives have focused on other pollutants. For example, many proponents point to the success of the United States’ Acid Rain Program in the 1990s, which targeted sulfur and nitrogen oxide emissions that contribute to acid rain. This program exceeded expectations in decreasing acid rain and met its targets years ahead of the original timeline. Because of these measures, the impact of acid rain in the US is far less than it had been in the late 1900’s.
One main feature of cap-and-trade programs that draws support is their market-based nature. This means that the carbon being traded creates a new market, where the price of carbon is determined by principles of supply and demand. Research indicates market-based regulatory options are more cost-effective than traditional regulations such as fuel regulation or fuel economy requirements. This is because market-based approaches allow individual actors the flexibility to find the most-cost effective ways to cut emissions and implement the cheapest abatement options first.
Supporters of cap-and-trade programs also stress that well-implemented programs are economically stimulating. Proponents argue caps on emissions can create a positive economic shock by spurring investment in green energy technologies and conservation measures. Additionally, supporters argue these policies promote the creation of new energy efficiency programs which generate jobs. It is also argued that revenue generated from auctioning carbon allowances can be directed toward investments for other green projects, including renewable energy production, conservation projects, and more energy-efficiency undertakings.
Arguments Against Cap-and-Trade
Many arguments against the implementation of emissions trading programs focus on the economic well-being of consumers. Critics argue that cap-and-trade programs damage the economy by raising energy prices, which would create a tax on energy consumption that falls on consumers as companies shift this burden onto customers instead of absorbing the costs themselves. In effect, this would burden low-income households and lead companies to outsource manufacturing, which would harm American jobs and increase unemployment. Opponents also point to previous examples of firms avoiding the cost of cap-and-trade programs. For example, the 2009 Waxman-Markey Bill sought to initiate the US’s transition into a more green economy with cap-and-trade programs, but it was met with high levels of corporate disapproval. In response, lawmakers included “handouts” to industry groups in the bill in an effort to generate enough support for the bill’s passage.
Opponents cite concerns over energy security (oil acquisition) in the US and a future of dependence on foreign nations. In the US, cap-and-trades will limit domestic oil production even though there are high levels of extractable resources. They argue that this will lead to a heavier reliance on foreign oil, especially from the Middle East.
Critics also assert that the design of cap-and-trade programs can be problematic. They cite past issues of cap-and-trade initiatives, like those associated with the European Union Emissions Trading System (ETS) or Regional Greenhouse Gas Initiative (RGGI). The EU ETS initially over-allocated emissions permits and set a very weak cap, rendering it ineffective until this was fixed. The RGGI initially taxed emissions without effectively reducing them overall. It is argued that these failures were due to weak design provisions, such as frequently fluctuating carbon prices and vague, over-allocated, and flexible emissions caps.
Emissions leakage is a challenge that affects many cap-and-trade programs. Leakage occurs when emission reductions in one jurisdiction are accompanied by increased emissions in other regions with fewer rules, as emitters search for ways to avoid regulation. Critics point to emissions leakage as evidence of design flaws that require additional cooperation to address.
