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Discussing the Cap-and-Trade Carbon Market

Can you put a price on pollution?  That’s the idea behind carbon pricing.  Putting a price tag on each tonne of carbon dioxide released gives us an idea of its cost to the environment.  When companies around the world buy and sell permits to pollute, it starts the search for the cheapest ways to pollute less.  That’s how Europe, China and parts of the U.S. are doing it, but there are arguments on whether that is working better than a simple carbon tax.

An article published by Bloomberg explains the situation: 

The United Nations is debating whether carbon pricing is an effective way to battle global warming.  Many countries have developed or are planning to develop carbon emissions markets, also known as cap-and-trade systems.   These programs don’t try to cut the total pollution level; rather, they try to reduce the emissions released per unit of industrial production.

The idea is that if companies have to pay to pollute, they will have the incentive to invest in cleaner technology or switch to less carbon-intensive fuels.

Carbon Tax vs. Cap-and-Trade

When companies are issued a carbon tax, the government sets the tax high enough to encourage industry to act on it and make some changes towards emission reduction, but not so high that it forces them to move or shut down.

For cap-and-trade, governments will set a target for how much pollution-reduction their specific economy can tolerate, and then distributes or sells individual rights to release carbon dioxide.  If a company is polluting less than their permit allots for, they can actually sell them to other companies.

The cap-and-trade market was first adapted by the European Union in 2005, but market prices plunged as a result of the global recession.  They’re only now starting to pick up again.  Australia scrapped plans for carbon permit trading after it was blamed for cutting jobs in the country.  However, New Zealand, Korea, California and the northeastern U.S. all have various forms of successful carbon markets, learning from the mistakes of other countries.

Arguments on Carbon Markets

The carbon market is up and running in a number of countries, but some believe the price isn’t actually high enough to change industry behaviors.  Others argue that it actually costs too much and does too little.  Some prefer a carbon market to carbon taxing because it “uses a market mechanism to identify the cheapest opportunities to curb pollution”, ensuring a certain level of carbon reduction.

Chris Vilcsak, CEO of Solution 105 weighed in with this comment:

“Although cap-and-trade is aimed at reducing carbon emissions as well as providing a marketplace for trading, it is VERY important that the initial set-up does not reward historical polluters by grandfathering their carbon emission levels.  Should a company who produces the majority of their electricity through burning coal (a high CO2 emitter) be rewarded by starting them off with the right to pollute more?  Of course, that makes no sense.  As a result, the initial set-up is extremely important.”

Carbon Market and the Environment

It is hopeful that the cap-and-trade process will drive more investment in greener technologies.  Companies will see a greater benefit in eco-friendly changes from installing energy-saving light bulbs to investing in carbon capture and energy storage.

Unfortunately, only a few Canadian provinces are actually doing something to curb emissions, whether it’s a carbon tax or emissions market.

“Canada has a whole ‘shames a national approach’ to acting on emission reduction,” comments Vilcsak.  “Shame on us and the federal government.”