Sorry – Cap’n’Trade ain’t working
Get rewarded for cutting emissions. Pay up if you don’t. Sounds good, doesn’t it? And it all market-based. That is the basic idea of Cap-and-trade. In theory, almost perfect. Unfortunately, it is all a bit more complicated in reality. For example
- What, when and where is the baseline? (the baseline is a point in the past, in relation to which companies/countries should reduce future emissions)
- Who gets how many allowances, and why? (allowances are pre-defined levels of the emissions)
The cap-and-trade scheme introduced at the change of the millennium for the corporate sector has made a nice little profit for some of the biggest emitters: thanks to low base-line set at a point in time when energy efficiency was in its infancy, inefficient companies could easily reduce their emissions below the allowances, and then sell allowances. While other, less emitting companies, had to pay up.
The inter-action between baseline and allowances define whether you can sell or have to pay up. In other words: depending on the definition of the base-line as well as the allowances, you will have it very easy or very difficult to educe emissions according to your allowances. In other words: it very much depends on the negotiated definitions. In addition, the definition of the base-line, allowances, and constant monitoring and the need for external verification creates a significant bureaucratic overhead. Which is maybe why Article 6 of the Paris Agreement, hoping to deal with emission trading, is still awaiting detailed formulation and approval.
- The success of emission trading systems depends very much on the definition of base-lines and allowances.
- 194 nations have signed up to the Paris Agreement. Very good. But how on earth will they agree on base-lines and allowances? Nobody wants to be short-changed. Which means that if there will be an emission trading system, it will be based on the smallest common denominator. In other words – close to useless.
- In theory, the emission trading system will lead to a global price for carbon. Which would be nice. But, see above, we already know now it will be way to low.
Market tools are good. Unfortunately, Cap’n’Trade is too complicated, and to inefficient. However – there’s a much simpler tool available. A tool that applies the same everywhere, and forces emission reduction incentives: a global climate tax.
It is inapprehensible that a climate tax is not even on the agenda at COP25.