Will Carbon Trading Work?

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Some opponents of cap and trade programs argue that a single program cannot solve the problem of climate change. They are right on two accounts.

First, a cap and trade program is not the only policy mechanism available to reduce GHG emissions. Fuel efficiency standards, renewable energy standards, technology standards, energy-efficiency standards and other sector-specific policies are all being used to reduce emissions worldwide, and in many cases they can achieve a specific policy goal more directly than a mandatory cap. This is why most cap and trade programs are proposed as part of a large suite of policies aimed at reducing emissions.

Second, a single state, regional or national cap and trade program alone is not enough. Ultimately all countries will need to participate in reducing GHG emissions in order to bring about the global reductions needed, and to fully address affects on international competitiveness.  

However, without linking policies to a specific emissions reduction goal, alternative policies alone are unlikely to lead to the amount of emissions reductions needed. For example, proposals for “no regrets” policies, which are beneficial regardless of climate impacts, would almost certainly fail to address the scope of the problem. A recent report published by former UK Prime Minister Tony Blair and The Climate Group, entitled Breaking the Climate Deadlock: A Global Deal for Our Low Carbon Future, lists carbon markets as one of ten core building blocks for an international solution.   Other components include the development of global and interim emissions targets, developed world commitments, developing world contributions, sectoral actions, financing, development and deployment of low-carbon technologies, addressing deforestation, adaptation to climate impacts and the development of existing or new institutions.

And while international cooperation is needed, there is good reason to believe that such cooperation is not possible without some countries moving first. This is not necessarily a bad thing. Early movers can gain competitive advantages in low-carbon technologies as well as provide incentives for other countries to act. Two examples are the EU’s offer to tighten their emissions cap if other countries take reciprocal action and the potential to use carbon markets as an incentive for developing country action.