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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
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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.
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=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.
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[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.
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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.
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<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.
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a=JkF1dGhUeXBlPWlwLHVpZCZzY29wZT1zaXRl#AN=
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