U.S. Cap-and-Trade System Is Very Beneficial

Posted April 20, 2007 at 3:42pm

It is time to take back from Europe an idea we Americans invented — a cap-and-trade system, this time on carbon dioxide. We need to adopt an American system, improving the cap-and-trade program that Europeans have been using for two years, to curb greenhouse gas emissions and reduce the threat of global warming.

The first cap-and-trade system was instituted in the United States during the presidency of George H.W. Bush to reduce emissions of pollutants that cause acid rain. The premise behind such a program is to force a reduction of pollutants by setting limits on emissions and tightening them over time. Polluters must either reduce emissions below the set limit or purchase emission credits from facilities that don’t use all their allowances. This allows polluters to trade credits, providing built-in flexibility that lets the market select the most cost-effective and efficient ways of achieving required emissions reductions.

The economic benefit of an American cap-and-trade system on greenhouse gas emissions will be to spur investment in new clean-energy technologies that could be exported to China and the entire globe. We can create high-wage jobs here by supplying green technologies to the world.

As we create an American cap-and-trade system to address climate change and improve our economy, we need to answer four fundamental questions. First, what should the goal be? The level at which the cap is set is essential and not arbitrary. Mother Earth will never tip her hat to say “thanks for trying” if Congress enacts a flawed policy that fails to adequately reduce emissions. Scientific studies suggest that our best chance of preventing the worst-case climate change scenarios is to reduce U.S. greenhouse gas emissions by 80 percent below 1990 levels, by 2050.

The second question to address is: What segments of the economy should be covered by the system? In this, we can learn from the European experience. Europe’s policy only regulates point sources of greenhouse gas emissions, such as power plants and manufacturers. As a result, some nations are not meeting their individual goals.

We can do better, as Americans historically have done, by including emissions from the transportation sector, which make up roughly one-third of U.S. greenhouse gas emissions.

Third, at what point in the distribution chain should permits have to be obtained? We have a choice to require this action “upstream,” meaning as close as possible to the origins of the fuel, or “downstream,” meaning closer to the ultimate point of emission. In most cases, we will favor the upstream approach, both for ease of application and the simple fact that this will capture the largest concentrations of potential pollution at one early point. This means that we should require permits from the refiners of gasoline, rather than the company that operates a fleet of trucks.

Lastly, how should emission allowances be distributed throughout the economy? There is general consensus that some portion of the allowances should be issued for free at the beginning to ease the economic burden on those who traditionally have polluted the most. We learned from Europe that it is a mistake to give away too many of these allowances because this actually can create enormous windfall profits for the worst polluters.

Ultimately, a sound allocation policy should ease the transition from a system based on partially free allowances to one in which polluters pay for each and every ton of their emissions. Revenue from the sale of allowances should fund programs that promote the development and deployment of clean-energy technologies, assist individuals and communities that are affected disproportionately by emission limits, and provide incentives to consumers for improving efficiency of their homes and vehicles.

The European cap-and-trade system for greenhouse gases, called the European Union Emission Trading Scheme, was established in 2003 and implemented in 2005. It’s the largest carbon-trading program in the world. Critics of creating such a system in the United States cite hiccups with the European model and exaggerated energy price increases as reasons not to move forward here.

It’s true that energy prices in Europe have gone up since the cap-and-trade program began in 2005. But testimony by Jill Duggan of the United Kingdom Department for Environment, Food and Rural Affairs before the House Energy and Commerce Committee in March indicated that the portion attributable to the cap-and-trade program was only around 6 percent.

Cap and trade has been successful in reducing acid rain in the U.S. by more than 30 percent and lowering harmful nitrogen oxide pollutants by more than 70 percent. We should embrace such a system to lower carbon dioxide emissions, applying lessons we’ve learned from the nascent European trading scheme.

There’s no doubt that Americans — who had the can-do spirit to invent the automobile, airplane and Internet — have the talent and ingenuity to rise to the challenge of global warming. There’s not a week that goes by when we don’t learn about another promising clean-energy breakthrough.

Congress should act now to reclaim our invention — cap and trade — to address the environmental threat of global warming and capitalize on the economic opportunity posed by it.

Rep. Jay Inslee (D-Wash.) serves on the Energy Independence and Global Warming Committee.