Post No. 101: What is "Cap and Trade" and Why are So Many Saying All of those Things about It?

We recently asked our readers to submit possible topics for discussion, and we received numerous responses. We've posted three of them thus far. Here is the fourth:

"I would like to read what the people who visit your blog have to say about cap and trade."

We indicated to the reader that although we had heard the term used, we were not very familiar with the details of the issue, other than the fact that people seem to be arguing about it. Consequently, we went to Wikipedia, and looked up the term. We were re-directed to "emissions trading," and an excerpt of the article appears below:


"Emissions trading (or emission trading) is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. It is sometimes called cap and trade.

"A central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emission allowance must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was needed. Thus, in theory, those that can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society.

"There are active trading programs in several pollutants. For greenhouse gases the largest is the European Union Emission Trading Scheme. In the United States there is a national market to reduce acid rain and several regional markets in nitrogen oxides Markets for other pollutants tend to be smaller and more localized.

"According to some, cap and trade "is inefficient and prone to market failure", and only a carbon tax 'allows you to make an international agreement globally effective in a short period of time.' However, a cap and trade system can be politically preferable for existing industries because the initial allocation of allowances is often allocated with a grandfathering provision where rights are issued in proportion to historical emissions. Most of the money from trading is spent on environmental activities, and the investment directed at sustainable projects that earn credits in the developing world which contribute to the Millennium Development Goals. Critics of emissions trading also point to problems of complexity, cost, monitoring, enforcement, and sometimes dispute the initial allocation methods and cap."

To see the entire article, simply click here.
So what's your position on all of this?