You don't have to be Al Gore to be concerned about carbon pollution's effect on our Earth. Scientists and world leaders are constantly considering new ways to reduce emissions, and some have proposed a process known as carbon trading, where companies are given carbon credits that they can either use for their own emission needs or sell to bigger polluters who need more credits. Is this the remedy for our ailing environment, or just a lot of hot air?
Will carbon trading “work”? A policy “works” or fails to do so only in relation to its objectives.
Carbon trading schemes have multiple objectives, including: (1) increase the cost of fossil energy, (2) foster innovation, (3) facilitate long-term business planning, (4) reduce emissions, (5) mitigate global warming, (6) perpetuate itself over the long-term, and (7) transfer wealth.
Carbon trading can certainly accomplish objective (1). Government has a long history of increasing energy prices via environmental regulations, excise taxes, renewable fuel mandates, renewable portfolio standards, restrictions on oil and gas exploration, and the like. Even in the initial phase of the EU emissions trading system (ETS), when most governments allocated permits free of charge and handed out more permits than emissions, allowing emissions to go up, German utilities raised their rates, claiming imaginary costs and passing them on to ratepayers. So higher energy prices under carbon trading is something we—or, rather, the rent seekers—can definitely take to the bank.
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