by Jenny Seib

 

Controlling Greenhouse Gases

Greenhouse gases in the atmosphere, adversely affecting Earth’s climate, have troubled scientists since the 19th century. However, this climate effect has only recently emerged as an important public policy issue. The first step in reducing greenhouse gases was through the Kyoto Protocol in 1997. The Kyoto Protocol, signed by more than 80 countries, urges industrialized nations to reduce and/or restrict greenhouse gas emissions to specific levels. While all the nations involved agree that the potential for future problems exists in regard to greenhouse gas emissions, no single country had actually ratified the agreement at this time.

 

As of June 2007, however, 174 countries and one regional economic integration organization (Eastern European Countries or EEC) have ratified the agreement.  Fears are high that the Protocol will not be successful. This is due, in part, to the uncertainty of balancing the costs with the benefits, as well as the reluctance of major countries, such as the U.S. and Australia, to jump on board.

 

The Cap-and-Trade System
Put simply, cap-and-trade is a way to effectively reduce pollutants entering the atmosphere by offering economic incentives to pollution-producing companies. Using this system, also called ‘emissions trading’, the government sets limits, or caps, on how much companies may actually pollute. In order to reduce the overall pollution, these limits are set lower than the current pollution levels.

 

If an emission-producing company goes over the cap, the company is then fined for exceeding their pollution limit. However, if a company actually produces less than their pollution limit, they can then sell the leftover “rights to pollute” to other companies who are in danger of exceeding their own pollution cap. These companies can then use the purchased rights to pollute to avoid stiff penalties for exceeding their cap.

 

In essence, one company sells or trades the right to pollute to another company. It’s a win-win situation for both parties as well as the environment. To help illustrate how the system truly works, let’s use television watching as a real-world example. Let’s say Richard watches television for 10 hours per week. His sister, Jane, watches approximately six hours per week. Their parents decide to limit, or set a cap on, the total amount of television watched by both children combined to 12 hours per week. To accomplish this, each child is given six cards, each representing one hour of television. If the children watch more television than cards they have, they are penalized by a reduction in their allowance. Let’s say Jane is a reader and only ends up watching four hours of television that week. Which means she has two television cards leftover. She sells Richard her two remaining cards, who then can watch eight hours of television. Richard spent less on his sister’s cards than he would have lost in allowance if he’d gone over his limit.  So everyone saved money and the parents’ TV watching limit was not exceeded. In this example, the hours of television watching might represent pollutants emitted, the 12-hour limit represents the “cap” or the total amount of pollutants allowed, which is set by the U.S. Environmental Protection Agency (EPA), and the cards Jane “traded” to Richard might represent the permits to pollute that an industry receives.

 

So, it is important that we understand that pollutants, such as water vapor, carbon dioxide, and methane, trap heat in our atmosphere at a rate faster than we can rectify the problem. The underlying philosophy behind the cap-and-trade system is to reduce damaging greenhouse gases. Companies that are easily able to reduce their output of these gases will do so and transfer their remaining credits to companies who find it harder or less economical to reduce emissions.

 

Further, this seems to provide a solution that is the least costly to the general population. Companies are forced to police the amount of pollutants they emit and, failing to control this effectively, can look to purchasing credits from others who have found reductions come more easily.

 

In some cap-and-trade systems, other organizations will purchase a portion of credits from companies who don’t need their entire allowance. Environmental groups often fall into this category. They then retire the pollution credits, which then serves to raise the price of any existing credits as there are now fewer available.

 

There are, of course, concerns with the cap-and-trade system of reducing global emissions. Some opponents fear the Kyoto Protocol is heading toward ultimate termination. Problems were seen early on when major developing countries, including the U.S., failed to sign on immediately. This led other countries to follow example, and less than anticipated consented to the terms of the Kyoto Protocol. Further problems arose when a lack of agreed upon mechanisms to include new countries was seen.

 

The economic costs and benefits are at the heart of the problem with the cap-and-trade system. For instance, the U.S. feels that(and economic studies have shown), the costs of the cap-and-trade system far outweigh the benefits. Many feel that a price-type solution, such as a carbon tax, applied to greenhouse gases would be more efficient. Under this system, there are no emissions limits set. Rather, a tax is applied to moderate the emissions or reduce the global temperature.

 

The Bottom Line

The cap-and-trade system aims to slow the growth of global warming by compelling companies to rethink their emissions process. Moreover, with practical ideas in place, many companies, which do find cost-effective methods of staying below their emission cap, can see sound financial incentives to move toward this goal. The system actually focuses on improving the quality of the atmosphere through the reduction of greenhouse gases.

 

In the past, restrictions were made, but lacked specific environmental goals. Subsequently, many companies found paying a tax or fine simpler than taking innovative steps to reduce emissions. This remains the foundation for many of the objections to the Kyoto Protocol, that contend a price-type system using an emission tax is a more feasible solution. However, the truth remains that the cap-and-trade system allows companies to achieve a specific environmental goal with far more flexibility and success than previous solutions to the problem of increasing global temperatures due to the buildup of greenhouse gases.