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Four Reasons to Use Cap-and-Trade to Fight Global Warming

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The cap-and-trade law that is solving the acid rain problem is a very rare species: an unmitigated public policy triumph. Sulfur dioxide emitted by power plants has been cut in half at a fraction of the predicted cost. Now, nearly two decades after that landmark bill, cap-and-trade is again taking center stage -- this time in the context of climate change legislation.

Last month, the House of Representatives passed legislation authored by Reps. Henry Waxman (D-CA) and Ed Markey (D-MA) that would use a cap-and-trade system to achieve deep cuts in the greenhouse gases that are causing global warming. The action now moves to the Senate, where Majority Leader Harry Reid has pledged to move similar legislation this fall.

The current momentum for serious climate change legislation should be a cause for celebration among environmentalists. And to be sure, most major environmental groups, including Environmental Defense Fund, have championed the Waxman-Markey bill and the cap-and-trade approach it relies on. Yet despite the proven success of cap and trade, we are already hearing from critics that cap and trade is a giveaway to polluters and ineffective to boot. Critics then argue either that we should tax carbon instead (if they are serious about global warming) or charge that cap-and-trade is just a tax in disguise (if they seek to sabotage it).

Here are four reasons why cap and trade not only differs from a tax, but is a superior, more effective means to slow and eventually halt global warming.

Environmental certainty. Let's keep our eyes on the prize: avoiding dangerous climate change. Emissions need to start declining fast enough in the US, as well as other countries with large emissions, in order to avoid warming that would cause ice sheets to disintegrate, drought to become endemic, and killer heat waves to become the norm. Global warming exceeding 3-4 degrees Fahrenheit would cause such risks to increase markedly. The Waxman-Markey target of a 17% cut below 2005 levels by 2020, and 83% by 2050, can help avoid the danger zone, assuming other countries act quickly, too. A legally binding cap is the only way to assure that this emissions objective will actually be attained.

International opportunity. The atmosphere is indifferent to where carbon dioxide, the main greenhouse gas, is emitted. So long as overall emissions come down, warming is kept in check. But while the benefit from reducing a ton of emissions in Boston or Bali or Beijing is the same, the cost varies widely. The "trade" in cap and trade saves money by allowing companies to take advantage of such differences. Many of the most cost-effective abatement opportunities are in the developing world. The ultimate goal, once countries like China and Brazil have adequate systems for monitoring their emissions, is a global carbon market -- benefiting both the developing countries that would reduce emissions and sell the resulting credits, and the industrialized countries that would buy them.

The market, not the government, sets the price. Cap and trade is a smart division of labor: Congress sets the cap, and the market sets the price on carbon needed to achieve it. A tax would also put a price on carbon -- but without the essential discipline of the cap to assure it would work. In fact, no one knows where to set the tax to achieve the environmental goal. In theory, if (or more likely, when) Congress got the tax wrong, it could quickly intervene and adjust the tax up or down. But does anyone believe that that Congress would revisit the tax on a regular basis? And even if it did so, continual tinkering would create considerable uncertainty, undermining the crucial incentive to invest in new technology.

Political viability. In our view, cap and trade is the best policy on the merits. But it is also the politically viable path. The Waxman-Markey legislation builds on a blueprint put together by the U.S. Climate Action Partnership (USCAP), a broad coalition of businesses and environmental groups. Meanwhile, a recent survey shows that of all regulatory approaches, the public likes taxes least.

A key political advantage is that this cap and trade program provides a built-in, flexible mechanism to compensate for higher energy costs -- either directly (via free allocation of emission permits) or indirectly (dispensing the revenue from auctioning permits). Much has been made of the supposed "corporate giveaways" in the Waxman-Markey bill. But in fact, if the bill favors any single group it is households: over the span of the program, more than forty percent of the total value of emission permits, through a combination of reductions in utility bills and tax rebates, would go to households. That amounts to a present value of more than half a trillion dollars going directly to American families. If that's a giveaway, we'll take it. In contrast, just over twenty percent of the permit value would go to industry, with another twenty percent funding public purposes such as investing in energy efficiency and helping communities and ecosystems adapt to a warming climate. (The remainder goes to small businesses and deficit reduction.)

When they're out of ammunition, critics often resort to the claim that cap and trade is too complicated and subject to gaming, while taxes are simpler. They somehow overlook the fact that the U.S. tax code is over 16,000 pages long -- or that every time Congress has tried to "simplify" taxes, the loopholes and exemptions have wormed their way back in, an outcome aided and abetted by highly-paid lobbyists and then implemented by high-priced lawyers. Not to mention the fact that the acid rain cap and trade program has a 99% compliance rate -- something that the IRS could only dream of.

Some environmental advocates complain that the Waxman-Markey bill is imperfect. And it is imperfect -- just like any legislation that contains the compromises necessary to get it passed. But a focus on the flaws completely misses what a monumental shift the Waxman-Markey bill would set into motion. Cap-and-trade succeeded in the acid rain case because it fundamentally restructured the incentives faced by industry: companies could no longer freely pollute the atmosphere, so they figured out new ways of producing electricity with less pollution. A cap-and-trade system for carbon dioxide and other greenhouse gases -- pervasive throughout our economy -- will restructure incentives on a much grander scale -- tipping the balance toward low-carbon, high-efficiency technologies, and rewarding entrepreneurs and innovators who develop the next generation of clean technologies.

In contrast to the success of cap and trade in addressing acid rain, the federal government has never used a tax to control a large-scale pollution problem. The window of opportunity to avoid a dangerous warming is closing fast. We can't afford the time to tinker with a tax. Let's rely on a proven approach, and cap greenhouse gases.

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