The Pollution Market: Capping and Trading Emissions

As a follow-up to my last post in which I mentioned the need for laws limiting environmental destruction, I have finally learned about this ‘cap and trade’ issue I keep hearing about. I wasn’t exactly sure what people were talking about, so here’s the low down. The cap part is a government-mandated restriction on emissions. The trade part provides a profit incentive by creating a new commodities market. A power plant that cuts its pollution more than required could sell the extra allowances to plants that could not cut emissions enough. While it may sound counter-intuitive to be able to buy pollution on the free market, this system allows us to reach environmental goals with the support of business.

The 1977 Clean Air Act had a ‘command and control’ approach, offering a one-size-fits-all solution that didn’t solve the problem of emissions control. By the late 80’s, Environmental Defense Fund president Fred Krupp proposed the first emissions cap and trading system which was written into the Clean Air Act of 1990 to help curb acid rain from sulfur dioxide emissions. The law required a 50% cut in sulfur dioxide emissions to help bring rivers and lakes back to life. It set a permanent upper cap on emissions and split up the quantity of pollution among the power plants. "But it was the second part of the law – the emissions-trading system – that completely transformed the paradigm that had historically pitted environmentalism against economic growth." (*page 5-6)

Two months later PG&E CEO Richard Clark said, "…now that there’s a way to make money from cutting pollution, I have a dozen proposals for emissions reductions from my own employees on the shop floor, and a dozen more from outside consultants. The environment isn’t just a money loser – it’s a profit center." (*page 6) "Within five years, U.S. utilities cut emissions 30 percent more than the law required, even while increasing electric generation from coal by 6.8 percent and reducing retail electricity prices." (*page 7) This type of innovation allows the cap, over time, to be lowered in order to reduce overall emissions, which is the goal in all of this.

With such results from sulfur dioxide, this same type of system can and should be applied to carbon dioxide emissions as well. Venture capitalist John Doerr said, "Every single day, we dump 70 million tons of carbon dioxide into our atmosphere like it’s an open sewer, like it’s entirely free to do that. It’s really hard to change consumer behavior when consumers don’t know how much their behavior costs." (*page 8)

*From the book ‘Earth, the Sequel: the Race to Reinvent Energy and Stop Global Warming’ by Fred Krupp and Miriam Horn, published in 2008.