Put Down Your Pistols: Cap and Trade Isn’t Dead Yet

Cap-and-trade efforts to combat global warming have often come under fire from politicians. And sometimes literally. Back in 2010, West Virginia’s now-Senator Joe Manchin memorably loaded a rifle, aimed it at a paper copy of the cap-and-trade bill, and pulled the trigger — all for a campaign ad. "I’ll take dead aim at the cap-and-trade bill," he intoned as he fired. Off the rifle range, more prosaic critiques of cap and trade include "job-killing" and "utter disaster."

Cap and trade now has a far more serious critic: the United Nations. In an April 2014 report on action to head off climate change, the U.N.’s Intergovernmental Panel on Climate Change (IPCC) condemns the world’s cap-and-trade programs in a few terse words. "Their short-run environmental effect has been limited," the report says. The reason, it continues, is that the caps on carbon have been too "loose" or have "not proved to be constraining."

Ouch. Think about that for a second: The climate scientists convened by the United Nations –scientists who desperately want to slow the march of global warming — have bashed the strategy once anointed as a universal solution by everyone from Newt Gingrich (albeit briefly) to the Europeans. Cap and trade is supposed to place a cap on carbon emissions and then allow companies to trade emissions allowances, so that the economy efficiently reduces warming pollution through low-cost measures that are also effective. (A "carbon tax" is a different route to the same end, but cap and trade niftily dodges the word "tax.")

The Europeans have had a cap-and-trade system for greenhouse gases in place for almost 10 years, and a range of other countries — New Zealand and parts of Japan, China, and the United States (Northeastern states and California) — have also tried their own systems. But the IPCC found that whereas energy efficiency, regulations, and tactics to change human behavior have been effective at cutting energy use and aiding the environment, cap and trade hasn’t really moved the needle. In some cap-and-trade systems, emissions have fallen, but it has been largely due to factors like the sputtering economy or natural gas displacing coal.

And yet, and yet. Hope springs eternal. Cap-and-trade advocates are a determined bunch, so don’t expect them to be put off by a pesky U.N. report. In fact, they’d probably agree with the critiques — and argue that there are several reasons not to kowtow to the rifle-toting crowd by writing off cap and trade as a climate strategy. There have been massive problems, most notably in Europe, where the cap-and-trade system now covers 31 countries, but the only way to overcome problems is to face up to them. Under pressure from unhappy industries, Europe massively overallocated emissions allowances, enriching traders while prices for the permits plummeted and key industries avoided the pain of emissions reductions. Problems have also occurred in the United States. The Regional Greenhouse Gas Initiative (RGGI), a five-year-old cap-and-trade initiative of nine Northeastern states that covers the electric-power sector, got bashed in the IPCC report as having "been ineffective since the cap has never been binding."

The first source of hope is that the basic concept indisputably works. Cap and trade was originally a Republican idea. Its initial incarnation of cap and trade, to combat acid rain by capping emissions of sulfur dioxide in the United States, succeeded wildly. The forests and streams of New England, once ravaged by pollution from the coal plants of the Upper Midwest, have bounced back at least in part — with the cleanup cost spread across a range of utilities.

These are also the relatively early days for greenhouse gas cap and trade. True, the sulfur dioxide trading program proved itself relatively quickly — it was still going strong after a decade. But many of the greenhouse gas programs are more complex, covering more economic sectors or including more countries, than the acid rain program. And some major greenhouse gas programs are just starting. California began a cap-and-trade program in 2012, and it will undergo a major expansion in 2015, moving beyond its current coverage of power utilities and other major industrial plants (like cement manufacturers) to include the transportation sector, which accounts for close to two-fifths of the state’s greenhouse gas emissions. Another new initiative is in China, which is piloting seven regional cap-and-trade systems with the hope of eventually expanding the concept to the entire country. New Zealand, which was singled out for praise in the IPCC report for having the "most comprehensive" carbon-trading scheme, will continue to expand it in May 2014. 

Existing systems that have failed are retooling to address well-known failures, though how effectively they will do so remains to be seen. The European Union is taking steps to reduce its glut of emissions permits so that industries have greater incentive to take measures to reduce pollution. Officials there are also considering whether to stop allocating permits for free to major industries after 2020. But it’s tough-going politically; in the latest example, the European Union exempted foreign flights from its emissions cap until 2016, under pressure from airlines in the United States and other countries.

In the United States, the Regional Greenhouse Gas Initiative in the Northeast is also trying to bounce back from ignominy. It recently tightened its cap, and carbon prices in a March 2014 auction leaped by a third. The cap will further decline by 2.5 percent each year, from 2015 to 2020. The initiative’s officials hope that the Obama administration’s forthcoming rules to limit emissions from existing coal plants, the first draft of which is due out in June, will spur expansion. "We believe that regional cap-and-trade programs like RGGI are the ideal mechanism to reduce carbon emissions from existing power plants," said Kenneth Kimmell, whom I interviewed in March when he was outgoing chairman of the initiative. (In May he will become the president of the Union of Concerned Scientists.) Once the rules are published, he added, "we expect a lot of interest among states in either joining RGGI or setting up their own programs that are linked or [that] we help them design."

Perhaps most importantly for the future, different systems are learning from one another. China has reached out to RGGI for expertise on regional (as opposed to countrywide) trading programs. The European Union is also helping China, having put nearly $7 million into helping the Chinese set up their programs, according to EU climate commissioner Connie Hedegaard.

New systems can learn from one another’s failures; California’s program, for example, put a floor on the price of emissions permits "specifically in response to the European trading market problem," said Kate Gordon, director of the energy and climate program at Next Generation in California, a project of billionaire Tom Steyer, in an interview in late 2013. Auctioned-off permits in California cannot dip below $10 (they are now above $11). Another lesson from Europe, Gordon said, is that a multipronged approach to reducing emissions works best; California, like Europe, has integrated a renewable energy goal and other programs with its cap-and-trade system. "We are all pretty grateful to Europe," she said.

But the real test of cap and trade will still be political will. To date, the failure of cap and trade has been something of a self-fulfilling prophecy. Politicians propose cap and trade, other politicians bash the concept, and then the caps are rendered loose enough to make the program toothless. There’s also a serious disadvantage that can hobble the earliest adopters of cap and trade. Companies can opt to do business outside the cap-and-trade area, in a nearby region that does not have a price on carbon. This is why Europe wants more international company and why California and British Columbia, where there’s a carbon tax, are eager for Oregon and Washington state to join the carbon-reduction club. Whether the world can summon the urgency to succeed remains to be seen.