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Bursic 3:00 L13 Disclaimer—This paper partially fulfills a writing requirement for first year (freshman) engineering students at the University of Pittsburgh Swanson School of Engineering. This paper is a student, not a professional, paper. This paper is based on publicly available information and may not provide complete analyses of all relevant data. If this paper is used for any purpose other than these authors’ partial fulfillment of a writing requirement for first year (freshman) engineering students at the University of Pittsburgh Swanson School of Engineering, the user does so at his or her own risk. CAP AND TRADE SYSTEMS LIMITING CARBON EMISSIONS Michael Arndt ([email protected]) ABSTRACT The climate has been steadily warming since the last ice age about ten thousand years ago. This is expected due to the cyclical nature of climate patterns. What is not expected is the incredible acceleration of climate change ever since the industrial revolution. An overwhelming culprit of this climate change is the energy producing firms who pollute an unrestricted amount. One way economists have proposed to limit emissions is a cap and trade program for carbon emissions. We cap amount of pollution and the non-polluting firms are rewarded for their sustainable methods. I’ve selected this policy because, in theory, it seems like a genius solution to stabilize the rampant enumeration of greenhouse gases in the atmosphere. I know there has been controversy in actually making these programs work, but I believe that there can be a solution. Some experts believe that cap and trade programs will never be practical in the society we live in today, while others are more optimistic that we simply just need a few policy changes for these economic programs to work. I agree that there has not been much success yet, but I think that there is great potential in the idea because of how economically sound its principles are. There have been several case studies that have highlighted the various shortcomings of cap and trade programs. California, for example, experienced unparalleled success at first with their cap and trade program but success tapered off quickly. On the other hand, the EU’s cap and trade program was a disaster from the start. With global support and a well thought out proposal, there is a significant chance that these programs can prove to be beneficial in decreasing the rate at which the climate is changing. CARBON EMISSIONS ACCELERATING CLIMATE CHANGE Climate change affects every person in the world, no matter what part of the earth they occupy. It has posed significant issues in just about every section of the world, from melting polar ice caps, to increasing the rate at which catastrophic weather occurs. It is widely agreed upon that the greenhouse effect is a major contributing factor to climate change. This is a natural effect that is caused by certain gases in the atmosphere, such as carbon dioxide (CO2), water vapor University of Pittsburgh, Swanson School of Engineering 1 Date of Submission-11.01.2016 (H2O), nitrous oxide (N2O), and methane (CH4). What happens is the sun gives off solar energy that is absorbed by the Earth, then radiated back into the atmosphere. These gases then absorb the energy and either reflect it back to the earth or to other greenhouse gases. Although this process is natural, global climate change has accelerated because of human intervention. In its Fourth Assessment Report, the Intergovernmental Panel on Climate Change, a group of 1,300 independent scientific experts from countries all over the world under the auspices of the United Nations, concluded there's a more than 90 percent probability that human activities over the past 50 years have warmed our planet [1]. This is partly because of the industrial release of air pollution. Atmospheric carbon dioxide has increased from 280 parts per million to 400 parts per million in the last 150 years. That time frame aligns very closely with the global expansion of the industrial revolution. The average amount of energy the sun provides to the Earth is constant, and yet the average temperature of the earth over a long period of time has had a general upward trend over the last 150 years. CAN CAP AND TRADE PROGRAMS LIMIT CARBON EMISSIONS? Industrial carbon pollution is a negative externality for the rest of society. This is because society does not directly gain from industrial processes, but they do directly suffer from the greenhouse gases released by the company. One economic method to minimize the negative externality is the concept of tradable permits. This is when each company is given a permit to pollute a certain amount and they can only pollute as much as they have permits for. A version of tradable permits called a “cap and trade program” has been used to limit various pollutants in an area. A great analogy for cap and trade programs is that it’s a huge game of musical chairs run by the government. Each year there are a number of chairs (permits) for firms to occupy. The government then incrementally reduces the number of chairs to sit in until they reach an environmentally stable amount of carbon emissions. Cap and trade programs have been very effective in some instances because first, they cap the number of pollutants that can be released in an area to a manageable amount. Then, since each firm is given a certain number of permits and some firms don’t need all of them, they trade their permits to other firms Michael Arndt who need to pollute more. This incentivizes firms to pollute less, increasing the presence of environmentally friendly machinery. Although the theory of cap and trade programs is very promising, results have varied because of various governmental reasons. emission reducing technology to adhere to the steep price for purchasing additional emission permits. Taiwan is one area that has had enough success with their cap and trade program case study to decide to launch it nationally by initializing a carbon market. Hsing-Fu Huang of the National University of Taiwan believes that one reason that Taiwan has been so successful is because it “set up a trading platform to help the dealers negotiate successfully” [4]. This way firms can place their extra permits up for sale to everyone in an action format. This method is much more efficient because firms no longer need to personally talk with every other firm. Now, all other companies can bid on those permits, making the system much more competitive and driving up the price for carbon to a more environmentally friendly amount. China has recently announced that they will attempt to construct a carbon trading system to limit carbon emissions in the country that contributes to global warming more than any other. Ye Bin, a researcher at the South University of Science and Technology of China, believes that “a nationwide carbon trading system is generally expected to lower the overall cost of national carbon emission reduction and to promote the development of a low-carbon economy in China” [5]. This is because China also plans to put significant funds in research and development for more efficient machinery [5]. Because China is putting funding into this sector, more companies will enter the field because they feel they can make a profit. This interaction creates a positive feedback loop that ultimately results in improved technology used nationwide to reduce carbon emissions. Lastly, the European Union’s cap and trade program has had very little impact for a different reason. Their program has failed because of governmental intervention. According to Peter Taylor, a respected environmental author, large businesses fear that if they have to spend more money to be more environmentally friendly, they will be outcompeted by overseas firms that don’t have to deal with a carbon market [6]. For that reason, the German government has given over eight-hundred million dollars of subsidies away to major firms, all but destroying all effect of the carbon market. In fact, the EU’s market is so poorly set up that there is a 1.8million-ton abundance of permits above what the actual pollution is. The EU can attempt to fix their broken system, but until then it will have no effect on the reduction of greenhouse gases. TEMPERED SUCCESS IN CASE STUDIES Although many believe scientists are the only ones who can solve the worlds global warming crisis, us economists play a significant role as well. We have the ability to set policy that remains beneficial for both polluting companies and the general population who suffer from the negative effects of climate change. Economists in government especially have a profound impact on making change when it comes to environmental issues. California is traditionally a state at the forefront of environmental issues because they have a large contingent of environmentally conscious policy makers. They have attempted to implement a cap and trade program to lower their carbon pollution as a state. California started off successful because, according to Danny Cullenward who is a scientist at the forefront of climate policy research, “California is the only western state that prices its carbon emissions, so utilities and power traders face an incentive to swap their high emitting imports for cleaner replacements—a practice known as resource shuffling” [2]. Since the companies now have an economic incentive (not having to trade for more carbon pollution permits) to purchase environmentally friendly machinery, they are motivated to spend extra money in the short term in order to save money purchasing permits. That is what happens in theory, unfortunately. California has experienced many ups and downs in their attempt to reduce carbon emissions. Firstly, the price for carbon when the program held steady at a reasonable $13 to $15 per metric ton when the program was initiated and shortly after. Then the price began to decrease until finally a price floor (minimum price) was set at $11.34. The setting of this price floor did ensure that economic incentive remained to go green with machinery, but it also vastly decreased the efficiency of the carbon permit trading market, making the supply of these permits exceed the demand for them, as all price floors do. What needs to happen for California’s carbon trading economy in order to stabilize it, according to David J. C. MacKay who is researcher in sustainable energy, is for a global carbon price to be set [3]. He believes that we must “harness self-interest by aligning it with the common good” [3]. This can be done by not only setting up a global carbon price, but by also adding a greater incentive to reducing a firm’s carbon emissions. An example of this would be adding tax breaks to the purchase of low emission machinery along with giving a firm the ability to trade unused emission permits. The last and most difficult measure to MacKay’s plan would be to set up an international “green” philanthropic fund that provides third world countries the ability to purchase WHAT NEEDS TO HAPPEN FOR CAP AND TRADE SYSTEMS TO WORK PROPERLY Cap and trade program must work because it is one of the only economically favorable methods for the government to decelerate carbon emissions which are a major culprit of global warming. Cap and trade systems can be very effective when implemented correctly because they both cap the amount of carbon emissions that can be produced, and they 2 Michael Arndt provide an economic incentive to firms who are efficient in minimizing carbon emissions. Although the number of cap and trade system failures greatly outnumber the successes, I believe that there remains hope that they can work in the right circumstances. First, a public platform must be made available that allows firms to freely trade their permits to any other firm. Second, the government must also put money into research and development of cost effective technology that also is environmentally friendly. Lastly, there must be a global price set for carbon. This will make it impossible for firms to be outcompeted by offshore companies. It will also prove that there is worldwide support for a sustainable planet that is not negatively affected by climate change due to greenhouse gases. The climate change can be counteracted, but we just need the global cooperation of governments to make it possible. ACKNOWLEDGEMENTS First and foremost, I would like to thank my girlfriend Caitlin Davis, for her expertise in environmental science and her continued support. I would also like to acknowledge my bed for providing me comfort while writing this extensive paper. Thanks to everyone for their kind words and to all my fans, look for my next masterpiece, writing assignment four, which will drop around Thanksgiving! SOURCES [1] “Global Climate Change: Vital Signs of the Planet” http://climate.nasa.gov/causes/ [2] Cullenward, Danny. "How California’s Carbon Market Actually Works." Academic Search Premier [EBSCO]. N.p., 2014. Web. 26 Oct. 2016. <http://web.b.ebscohost.com/ehost/pdfviewer/pdfviewer?sid =df500492-a112-4fdc-b1c93cff831cd6c1%40sessionmgr104&vid=9&hid=116>. [3] MacKay, David. "Price Carbon - I Will If You Will." Academic Search Premier [EBSCO]. Nature, 15 Oct. 2015. Web. 26 Oct. 2016. <http://web.b.ebscohost.com/ehost/pdfviewer/pdfviewer?sid =d7e2d651-3561-4771-a8e0289a9b3bb245%40sessionmgr106&vid=11&hid=116>. [4] Huang, Hsing-Fu. "An Agent-based Model for an Air Emissions Cap and Trade Program: A Case Study in Taiwan." Academic Search Premier [EBSCO]. El Sevier, 1 Dec. 2015. Web. 27 Oct. 2016. <http://web.a.ebscohost.com/ehost/command/detail?sid=072 2f211-a2fb-4df4-abf7b93f7a1763ea%40sessionmgr4006&vid=24&hid=4204>. [5] Ye, Bin. "Research on China’s Cap-and-trade Carbon Emission Trading Scheme: Overview and Outlook." Academic Search Premier [EBSCO]. El Sevier, 15 Sept. 2016. Web. 26 Oct. 2016. <http://web.b.ebscohost.com/ehost/command/detail?sid=8e4 2a6a0-2ff3-4587-966ceb9988382e80%40sessionmgr120&vid=9&hid=116>. [6] Taylor, Peter. "An Experiment That Failed." Academic Search Premier [EBSCO]. Canadian Business, 4 Mar. 2013. Web. 29 Oct. 2016. <http://web.a.ebscohost.com/ehost/detail/detail?sid=960e35 d7-c262-4a28-8b397316d1c7e790%40sessionmgr4008&vid=1&hid=4204&bdat a=JkF1dGhUeXBlPWlwLHVpZCZzY29wZT1zaXRl#AN= 85721819&db=aph>. 3