Will Carbon Trading Work?

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Reducing GHG emissions through a cap and trade program comes with a cost. In fact, that’s partly the point.   It’s the additional cost of using high-carbon energy sources that’s meant to encourage businesses and individuals to use low-carbon technologies and become more energy-efficient. An MIT study assessing cap and trade proposals in the 110 th US Congress estimates this cost to be about a 0.5% loss in economic welfare at the start of the program rising to about 2% in 2050. Similarly, a report from the EIA estimated that the recent US cap and trade proposal from Senators Lieberman and Warner would have resulted in a total GDP loss of between 0.2 and 0.6% from 2009-2030.  

The question is how do these costs compare to the benefits of a cap and trade program. The aforementioned cost assessments intentionally exclude a discussion of benefits, partly because these benefits are inherently hard to estimate.  

What is known is that if we continue to emit GHG emissions at our current pace, it is likely that we will experience significant changes to the climate system, including increased heat waves, extreme weather and high sea levels with adverse affects on agriculture, forestry, ecosystems, water resources, industry and human health (IPCC Fourth Assessment Report). Furthermore, these changes could be abrupt and irreversible, with tremendous costs that go beyond financial consideration.

In the absence of exact probabilities on the likelihood of these impacts, opponents of mandatory caps have tended to treat their likelihood as zero, focusing almost exclusively on the costs. This ignores the benefits of avoiding the harmful impacts and potential catastrophes associated with unaddressed climate change. The good news is that a growing majority of the world’s leaders do recognize these benefits, as the recent agreement by G8 leaders to reduce global emissions by 50% by 2050 demonstrates.