What's the Deal with Cap-and-Trade?

by Andrea Millar — May 15, 2008

You may have caught some of the recent political fervor about the environment, namely something called cap-and-trade. Hillary Clinton and Barack Obama are both adherents to cap-and-trade methods, which use permitting to regulate emissions from companies. The more emissions you produce, the more permits required.

Cap-and-trade methods are a big part of articulating future plans for the environment, but they have a fairly long and successful history in this country. Much of the SO2 gas responsible for acid rain has been curtailed by cap-and-trade measures. Now California and states in the Northeast have linked with the Regional Greenhouse Gas Initiative to manage their emissions trading by taking notes from the European Union's trading scheme. They, of course, got theirs from the Kyoto Protocol (we didn't bother with that one).

By using the principles of the free market, cap-and-trade essentially commodifies pollution, or at least the ability to produce it. This concept hasn't sat well with some critics, who state that it's merely a way to permit the richest offenders to keep operating as usual. Still, it has wide support, and fits nicely with other aspects of the corporate model. The concept of trading is one many of them understand, and by buying and selling with other companies, they can actually save more money than they would have with traditional emission-cutting methods. And with auctioning, external companies such as Green Peace can actually purchase permits to drive up prices.

I understand the incentive-based style of the cap-and-trade system, and I'm even a reluctant fan of the way it utilizes the fee market. However, I'm concerned about the accompanying technology to service such mandates. Monitoring equipment will become cheaper, but just how many filters does it take to eliminate 25% of you emissions? Hopefully, this is just a minor snag on the way to getting our CO2 levels back down to an acceptable place, although something tells me it'll be a little trickier thank winning an auction.