Cap and Trade emissions schemes will not save the planet from climate change

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.


8 Responses

  1. Boy, I disagree with every single point made in this column.

    As a banker and environmentalist I encourage cap and trade for carbon. The way I think of it is as finally putting a price on ALL the negative side effects of our current energy usage. All the health, environmental, trade deficit, national security issues are in a way being lumped into this value for carbon usage.

    Energy companies that build renewable energy will be selling carbon credits and polluters will be forced to buy them, no matter the price, for as long as there is pollution. The cap and trade system ALWAYS benefits those who are ahead of the cap and penalizes those who are behind. I’m really not sure how the author comes to the opposite conclusion.

    I would be happy to go point by point through this article if someone wants me to but for the sake of brevity, let me just say that markets are sometimes the answer to problems. Give the capitalists something they can understand and they will play along. Give them regulation and dour consequences and they’ll see you in court. Many corporate managers are good people and are taking their companies in the right direction. Be prepared to reward them!

  2. In this case, Tim, the regulations I envsiage are those that prevent industries from pollutting the atmospher with carbon emissions. Cap and trade in effect gives them a licence to pollute.
    The trouble with markets is that they are very good at finding loopholes, massaging figures and creating an impression when actually very often the poosite is happening.
    I guess as a banker you believe in markets, lijke a physician believes in medecine and a surgeon believes in surgery – we all tend to believe in the expertise we know best.


  3. How to over complicate a problem should be the title. I think we should work on preventing fish from flatulating and depositing waste material in the 2/3 of the planet we live on. Isn’t that a bigger threat than burning micro bacterial waste (formerly thought of as fossil fuels). Lemming, please line up in the cognitive disonance line.

  4. Working on preventing fish flatuence will help decelerate the rate of climate change about as quickly as emission trading.


  5. Experienced, trained scientists like me gag at the very presumpion that CO2 causes warming. The basic, fundamental assumption of carbon emissions causing the planet to warm is fatally flawed. The non-scientific public is spoon fed this crap (by Gore and others) and the “carbon is evil “assumption is sold. Right? Wrong ! This cap and trade and carbon credit BS is simply a Marxist mental masturbation exercise. The earth has been cooled and warmed BY THE SUN as evidenced by hundreds of millions of years in the geologic record. The ice caps on Mars are melting beacuse of the sun, for crying out loud. There are 38 molecules of CO2 for every 100,000 molecules of atmosphere. How can it cause warming? (It cannot). The sun heats the oceans (which hold 68 times more CO2 than the atmosphere) , and the oceans release CO2. Ugh. Sheeple.

  6. Mr Almond

    Experienced trained scientists like Stephen Hawkin and many other Nobel Prize Winners do not share your view. By the way, If your trained scientific argument is that 386ppm CO2 is too small to make a difference simply because it is small, then I am afraid that you are standing on very shaky ground!


  7. What we will have due to these caps is Mr Clean in Europe and Mr Dirty in the China and India, what will happen when the new rules take place is, the companies that are strangled by these new rules, will simply move their remaining dirty practices to the dirty countries, enough work and jobs have already been taken away from us by our hand, the rest will follow and we will become a ghost country who then reley on the rest of the dirty world for what we need to live on.

    Who are we to tell the rest of the world not to do what we have for the last 100 years, I can tell you that money is far more important than not polluting and they will do what ever they want to get at it, we are at the mercy of the finantial sector who are investing heavily in these dirty countries right now, thus adding to the problems..

    Its no good the ketle calling the pot black and then asking them to pay for cleaning up their act.

    Bring back home our engineering and the work force, the people with the knowledge who leave our shores to the sum of 200 thousand each year, these are the people with the skills and the money and the where with all to start new companies, if we continue to let in people who are of no benefit to the country, and let the time served craftsmen go, we will die a horrible death in the manufacturing arena.

    Making people work for nothing and then giving others something for nothing doesn’t work in the long run for the whole, is what is happening today, when we let companies turn their backs upon us, thus loosing our jobs, thus having to pay all those who are now out of work because of this very policy, its doesn’t work the way we are now and it will never be resolved as long as we are governed by those with vested intrests in part forein.

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