Virtually every Government and economists embraces the concept of “cap and trade” as the best way of reducing climate changing greenhouse gases emissions and the cheapest way of avoiding emissions. Governments (and economists) do not usually find the cheapest way of doing something. If they did I expect our taxes would be lower.
However, in the UK, in Europe and in the rest of the developed world all kinds of Emission Trading Schemes have been developed, with carbon credits and other financial instruments approaching the complexity of derivatives attempting to drive the cost of pollution higher as a way of making the polluters find cost effective measures of polluting less. Do these cap and trade schemes work?
The short answer is that these schemes will not drive down greenhouse gas emissions in any meaningful way; they will not save the planet nor will they make a difference. I shall explain why.
First, we should understand what the essentials of all cap and trade schemes are; the government imposes a cap on how much each industrial sector is allowed to pollute and then divides that capped amount between the industries in that sector, usually according to market share.
One business in the sector (let us call it “Dirty Limited” might find it too expensive to reduce its emissions but another business (we will call it “Clean Limited”) might find it very cheap so to do. Dirty Limited will have to pay money to Clean Limited to buy Clean’s savings. Clean will use Dirty’s money to reduce Clean’s pollution and Dirty may continue polluting as it did before. That way the government has limited pollution by giving both companies a financially viable way to reduce pollution, or so the theory goes.
The Government then sets a new lower “cap” which has the effect of reducing pollution further and the whole thing starts again, in theory limiting pollution even more until it gets down to zero, or at least an acceptable level.
What is the problem, you may ask? Well, it is bit like a pyramid scheme or these highly complex derivatives that the market has suddenly found worthless after buying and selling them for years. They cannot be perfectly designed, because the cleverness of people and businesses will find ways to exploit the loopholes so the efficiencies will almost certainly be less than expected.
Of course it goes without saying that any businessman worth his salt would have postponed carbon saving measures as soon as the cap and trade scheme was announced, even if he would have undertaken them in any event, so as to profit from the scheme when it came into force.
The theory of cap and trade is founded upon the assumption that setting a series of more stringent emission targets is a plan to stabilise emissions. It is not. It is simply a small way to make emissions less than they might have been, by a small amount, not to reduce them fundamentally and permanently.
You can reduce emissions by various means. The most popular way is to make fuel efficiencies. These should be made in any event; fuel efficiency is not a climate change plan – it is simply a single small but essential part of it. By itself if every industry in the world were more industrially efficient, in energy terms, there would still be increased emissions by the very increasing levels of human industrial activity.
The over-riding aim of an effective climate change policy should be to keep fossil fuels fossilised, rather than to burn them. What “cap and trade” ignores (perhaps conveniently) is that routine fuel efficiency will form the basis of all cap and trade schemes, rather than investment in renewables.
This gives highly polluting industries – such as those generating electricity, time to delay the change over to renewables, rather than forcing them to invest in renewables. It is noteworthy that e.on have decided to invest in a coal burning electricity generating plant at Kingsnorth – even though they have had the “cap and trade” laws in place for some time and received a substantial windfall from the European Emissions Trading Scheme – though more of that later.
Cap and trade cannot be effective in limiting emissions if a major electricity generator is financially able to use the dirtiest form of electricity generation in a new power plant.
Those businesses in the various emission trading schemes will concentrate on short term emissions savings with no incentive or commercial reason to move away from fossil fuel dependence in the long term.
There is no worldwide plan (or even any nationwide plan) to move industries away from fossil fuel. In fact the various emissions trading schemes that apply across the world seem to lock industry into fossil fuel by providing them with a licence to burn it, at a modest cost. These schemes will make industries more energy efficient, but that is nowhere near enough.
It is a bit like the UK Government’s recent program to alleviate fuel poverty by insulating more homes – useful but it does not provide a solution It will probably might make things a little less worse for people in fuel poverty.
All the emission trading schemes ignore how cuts are made by rewarding all cuts, however they are made, rather than rewarding long term changes where industries can abandon a significant part of their fossil fuel use permanently.
Clearly, legislating on energy efficiency for industries does not have to be rewarded with a prospect of financial reward where the carbon saved can be sold to others, any more than we need to incentivise, say, health and safety legislation with a “health and safety cap and trade scheme”.
This is the fundamental flaw in all these schemes. Fuel efficiency should be undertaken because it is in the common interest, and because the cost (in terms of pollution, flooding climate change and the rest) is not directly or proportionately borne by the industries that pollute or the consumers that buy from those industries.
We have not only a very fundamentally flawed way of reducing carbon emissions in these schemes but they have some very curious effects. The European Emission Trading Scheme when it first started gave polluters that were subject to it the right to pollute more than they were polluting at that time giving them a huge windfall without getting a single commitment to reduce pollution in return. These windfalls across Europe will be worth over £65 billion by 2012.
In essence what politicians have decided is that carbon prices can be made high, but not so high as to have no adverse economic effect. That much is true, but whatever the price, high carbon pricing will not lead to any significant greenhouse gas emission reduction any more than high oil and natural gas prices have led to any significant emission savings.
Filed under: carbon emissions, carbon trading, climate change, Coal, electricity, energy, fuel poverty, renewables Tagged: | cap and trade, emission trading, ETS, flaws in cap and trade mechanisms, Kingsnorth, who cap and trade schemes work, windfalls from cap and trade schemes