Will Carbon Trading Work?

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Would carbon trading facilitate long-term business planning—objective (3)? Many business advocates claim cap-and-trade will provide “regulatory certainty” by establishing statutory targets and timetables for emissions reductions. But EPA’s recent Advanced Notice of Proposed Rulemaking is a veritable roadmap for regulating greenhouse gas emissions under the Clean Air Act, and several environmental groups and State governments are suing EPA to regulate GHG emissions from automobiles, air craft, ships, off road vehicles, power plants, and more. None of the climate bills Congress is considering preempts further regulation of GHGs under the Clean Air Act. Moreover, the Lieberman-Warner legislation specifically allows States to set targets more stringent than the federal targets.

A more fundamental point is that a cap actually makes business planning more difficult, because costs can fluctuate wildly. Firms simply have to meet the cap, regardless of what it costs, and permit prices will go up or down depending not only on the stringency of the cap but also all other market factors that affect the demand for and supply of energy.  

Can carbon trading reduce emissions—objective (4)? Sure. But whether the emission reductions will be anywhere near as big as promised is another matter. Europe ratified the Kyoto Protocol and the United States did not, yet EU emissions are rising faster than ours. Cap-and-trade offers many opportunities for creative accounting and business-government collusion to game the system.