Everyone with half a brain knows we need to address climate change by cutting carbon emissions. One of the policy options you may have heard a lot about is cap and trade. But what exactly is that, and does it really work?
A cap and trade system, or carbon market, is essentially a way for companies to trade a dwindling supply of emissions allowances. So far, cap and trade has been the main way governments have tried to kickstart emissions reductions. The other big idea out there is a carbon tax, but in the U.S. at least, that’s failed to gain much political traction outside of Bernie Sanders and a group of old guard Republicans.
The market-based cap and trade approach has been implemented in more than 40 countries, states and regions, with mixed success. The European Union’s carbon market hasn’t made a meaningful impact on emissions due to too many permits and low prices. In California, an auction of credits last year could be worth up to $640 million in revenue for the state. The program has been extended 10 years, giving markets something they crave most: certainty. The cap and trade program appears to have played a role in emissions falling in the Golden State.
The biggest wildcard out there is China, the world’s biggest carbon emitter. It’s in the process of setting up the world’s most ambitious carbon market. Its success or failure will have a huge impact on whether the world is able to meet the 2 degree Celsius goal outlined in the Paris Agreement.
Releasing the right amount of permits is the biggest issue confronting cap and trade. If the cap is too high, nobody will cut pollution. If it’s too strict, businesses might just choose to move their polluting activities elsewhere to cut costs, a process known as leakage.
And while policymakers from California to China to Canada are working to overcome this and other issues, it’s also clear that markets alone can’t solve a problem they created. They’re just one tool out of a suite of options to address carbon pollution. With a huge problem like climate change, we’re going to need them all.