Myths about Cap and Trade

Back in December Obama made a very public pledge to deliver a national cap and trade system and the President’s budget, unveiled Thursday, outlines in surprising detail how and when he plans to fulfill this pledge. His timetable is radically aggressive and assumes that legislation can and will be passed this year in order to have a functioning market up and running by 2012. 

I am thrilled about such a bold commitment but as I skimmed the blogs and some of the more nefarious news outlets, I started seeing that not everyone was so happy.  Having studied the EU Emissions Trading System, a similar system to the one Obama is proposing, I also came across a whole lot of information and claims that seemed to be just plain wrong. I’ve taken some basic points that most people want clarified and outlined, from my knowledge of previous schemes, what the evidence suggests.


1) Your energy bill will shoot through the roof. Electricity costs will spike with the introduction of the scheme and, as they are accrued annually, it could be likened to “the largest annual tax increase in the history of America”. But this would overstate the net impact on everyday consumers. The increased cost of production will be passed onto consumers but the government, by auctioning off the emission permits, will also receive the full amount of these costs. To the degree that the government passes this money on to you, in the form of lower taxes elsewhere or rebate checks, the net effect will be neutral. Obama’s plans acknowledge the increased costs but link the revenues they generate to a rebate system for those with the least disposable income. The criticism that energy costs will increase sort of misses the point; the costs need to increase so that consumers too begin to make the right decisions and use less energy. But this doe not mean that you will necessarily be any worse off overall.

2) It will further damage the US economic problems. Obama specifically designed the programme to take effect on the economic upturn but even if the timing doesn’t quite work, it is not clear that all of a sudden US firms will become uncompetitive. In fact, some firms like General Electric welcome the program as a way to stay competitive domestically and globally. In the energy industry all sorts of new low-carbon projects will become viable at the expense of some coal companies and companies will be forced to diversify but American consumers cannot logistically turn to other countries for alternatives. Any firms that fail will necessarily be replaced by a low-carbon alternative that succeeds. At its best, early US action may build an efficient low carbon industry that other countries will one day turn to.

3) Cap and Trade means big government bureaucracy. Yes, it does mean an added government bureaucracy but perhaps less than under any other carbon reduction scheme. Carbon emissions will need to be monitored, carbon credits will need to be auctioned, and a functioning trading market will need to be established. This means bureaucracy any way you put it but monitoring emissions is typically done on the basis of output and technology use, auctioning is already done regularly by government with things like radio bandwidth, and the markets are set up by entrepreneurial businessmen.

4) It won’t do any good for the environment. One logistical problem with cap and trade programs is that the market price of carbon determines the amount of reductions that will take place. Governments progressively remove the amount of carbon credits available, thus increasing the price and increasing reductions. However, they never quite know in advance how many permits to sell to achieve the level of carbon reductions they want. The EU trading scheme had some problems here by over-allocating permits, and allowing reductions to be ‘bought’ elsewhere in the world, hence little carbon reduction domestically. But is seems that lessons can quickly be learned and each year, the appropriate adjustments can be made so that the long-term net effect is an appropriate level of carbon reductions.