Will You Trade, or be Capped?

Cap-and-Trade legislation WILL have an effect on you.

Published on: May 18, 2009
In the debate about greenhouse gas emissions carbon has become the villain to be slain, at least in the halls of Congress, and one of the most likely scenarios being considered is a so-called "cap-and-trade" policy. Such a policy would allow the government to sell (or give away) allowances (legal permits to emit greenhouse gases) and would cap certain industries at an arbitrary amount of such gases to be released.

Industries capped, would be required to purchase allowances to offset their total emissions of carbon-based gases. As legislation winding through Congress at this time is shaping, those allowances would generate revenue for the U.S. Treasury, much of which would be funneled into the general fund, while a portion would be returned to energy-conservation and other projects deemed to have some significance to lowering the amount of greenhouse gases released by the nation's private sector.

Such a program would ultimately drive up the cost of electricity rates (since more than half of the nation's electrical energy is produced by burning coal or natural gas) and would most certainly increase the cost of transportation fuels. Estimates range from 10% to 30% increases in these sectors, or as some have predicted an annual cost to the average household of about $3,000 per year. Estimates vary, but on the low side, recent EPA estimates indicate the legislation could cost households $2000 per year by the end of the program.

A national cap (the amount of greenhouse gas that can be legally emitted by the nation's industry, households, transportation etc.) would be subdivided into caps for individual entities within the capped sector. For instance, the power industry would be capped at a given amount of emission, and would have to purchase sufficient allowances to equal that amount of emissions from entities (such as agriculture) which have the ability to offset greenhouse gas emissions through carbon sequestration practices. So-called offsets in the plans are generally equal to an allowance and both are generally denominated in metric tons of carbon dioxide equivalent emissions.

Allowing offsets from uncapped sectors in a cap-and-trade system provides significant cost and flexibility benefits, particularly for uncapped sectors of the economy. Agriculture and forestry, for instance, both expected to be "uncapped" entities under proposed legislation, have the ability to produce a significant quantity of reductions of greenhouse gas emissions than "capped" sectors. So, by purchasing allowances from agriculture and forestry, capped sectors could meet their emission limits less expensively than eliminating or reducing emissions through their own processes.

Ultimately, the goal of those interested in cap-and-trade legislation is to increase the cost of emitting greenhouse gases to provide the incentive for lowering those emissions.

Source: Carbon Policy Primer, 25X'25.