Cap-And-Trade 101

All three of the candidates for president came around at the end of the primary season to support some form of a cap and trade plan to help cut carbon emissions. “Cap and Trade,” in case you missed it, means that laws would be passed to cap the total amount of emissions produced by polluting companies. Some will be able to cut back to a level under that cap and they will be able to “trade” the difference back for credit. Others will still go over that cap, but if they do they will pay for it by fines. The under polluters in effect would be trading their good works for the sins of the over polluters. The hope is that (along other yet-to-be-determined conservation techniques) the combination of carrots and sticks will begin to pull down emissions to tolerable levels before they become simply intolerable and we cease to exist as a species.

With both presidential candidates (and Hillary Clinton) supporting some form of cap and trade, it is certain that next year we will at least begin to move the ball forward on this issue. So, at the very least we have moved from the rejection of any plan in the Bush administration to a debate now on what is the best kind of system.

The difference is between how the permits to pollute are allocated. Senator McCain’s plan would most of the permits to companies that are now the biggest polluters. This makes a lot of sense. The largest polluters are those who will have the hardest time pulling down their emissions to the capped levels.

On the other hand, Senator Obama supports allocating permits through an auction. Under his plan, every company—large or small—would buy the rights to pollute according to how much they go over the cap. The result is that the biggest polluters would pay for the most rights. The logic here is that if they pay a larger fee, then they would have a larger incentive to work harder next year on cutting their carbon emissions.

There is benefit in both plans, but I come down on the second, mainly because I’m unhappy that the worst polluters have been allowed to get to this level in the first place. Atmosphere is something that should be a part of the civic commons. If you use up something that belongs to the total community, then you should pay for it. When a gas company back in Oklahoma uses up the gas under my grandfather’s property, I get a check each month. They are using up my natural resource. We get a dividend for their removing a resource that I own.

Why shouldn’t the same principle apply when industries use the biggest common resource of all? The money they pay for permits could be returned as yearly dividends to every American family. Or they could be spent on pollution research, on environmental resource protection. Every little bit helps.

Part of the logic behind Senator McClain’s proposal is that if the industries that pollute the most will pass their higher fees on to the consumers. That’s true, but at the same time that will decrease their sales (consumers won’t purchase as much of their products) and in the long run it will in their best interests to pull down the emissions to help pull up their incomes. And as soon as they lower their emissions down to below the cap, they will start receiving yearly dividend checks which would offset any price increases.

So, while both plans will move the ball forward on pollutants, in case you happen to be in one of those town meetings the two candidates are talking about and get to ask a question, don’t ask them whether they are for or against cap-and-trade. Ask them how the permits will be divided up. Who wins and who loses on each system. That’s a much smarter question.

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