12 Cap and Trade Pros and Cons

Cap trade refers to a system that requires industries to cap the amount of carbon emissions that are released into the atmosphere over a specific time period. For businesses that cannot achieve this cap, they can trade with other companies that won’t reach their cap limits. The overall goal is to reduce emissions over time by slowing lowering the caps, thereby potentially removing the threat of global warming over time.

When evaluating cap trade pros and cons, there are a number of different points of view that must be considered when designing rules and regulations governing this idea. Here is a select look at some of the most important points.

The Pros of a Cap Trade

1. It creates a new economic resource for industries.
The idea of the cap trade is based on two specific points: companies will be encouraged to lower their emissions because there is a low cost to do so while companies that have emissions credits can sell them for extra profit. This creates economic resources in both areas because more is spent to lower emissions and the credits are a new product to be purchased for additional profits.

2. There is a predetermined maximum level of emissions.
Most companies that are not regulated on their emissions aren’t going to care what they release into the atmosphere. This makes it difficult to track atmospheric influences that the emissions may have. By having a predetermined maximum amount that is released, we can have a better idea of what is happening to the air we breathe while being able to work on reducing the maximum levels over time.

3. It can be a way to supplement taxpayer resources.
The government often purchases emissions credits when they are available and then sells them at a higher price to businesses when they are needed. The income from these purchases helps to supplement the resources that taxpayers are providing the government. Although some may see this as the government giving businesses the right to pollute the air, the credits are still governed by the approved overall maximum limits.

4. It could help to fund alternative energy resources.
There is enough oil to last for nearly a century and there is enough coal to last for nearly 5 centuries. We have plenty of fossil fuel resources available to us, but future generations may not have this convenience. This means it is up to us right now to start funding research into alternative energy resources. The income from credits can help to make this happen, even when a cap is in place. This income can be supplemented with carbon taxes in place that work with the cap trade system.

5. The average person can create change.
The cap trade system creates a new knowledge base for consumers because certain products may not be in compliance with the laws. Consumers can then choose whether or not to purchase from businesses who choose to remain out of compliance or attempt to cheat the system. This gives the average person the ability to start a positive change because they ultimately control the purse strings.

The Cons of a Cap Trade

1. Many of the emissions credits are just given away.
Businesses have a number of ways that they can gain extra emissions credits. The goal is to create a “trade” mechanism so that businesses are able to mutually benefit from them, but many of the credits are simply sold at auction to the highest bidder. Sometimes these credits are just given away, creating no trade benefit at all. This means it costs a business nothing to expand their emissions and that can harm a local economy, which receives no economic gain in return.

2. The government can retire emissions credits.
Because every business has access to emissions credits, it means that the government also has access to them because they also have an economic impact on society. What makes the government different than a business when an emissions credit is received is that the credit can be canceled and removed from circulation. This means taxpayer money is used to purchase something that isn’t used and could potentially stagnate industry development.

3. Some credits are artificially high in price.
It isn’t just the government who can purchase emissions credits and not use them. Many environmental agencies have also discovered that they can purchase these credits and choose not to use them. They may not have the authority to officially retire the credits, but they can hold onto them indefinitely and create the same type of result. This means when credits are traded as intended, their price may be artificially high.

4. The emissions credits are almost always cheaper than converting to friendlier resources.
For industries that use fossil fuels, the cost of converting to more renewable resources can be very high. The emissions credits, offsets, and even penalties and fines for exceeding a cap limit are all cheaper than going through a conversion to a new source of energy. This means there is no real incentive for those industries to change their practices.

5. It is relatively easy to cheat the system.
Most industries don’t have monitoring devices installed to determine how much output is really occurring. This makes it very easy for the average business to cheat on their emissions reports if they are so inclined. For the cap trade system to be effective, some sort of time frame monitoring must be implemented so that enforcement can take place.

6. It would create higher prices for goods and services.
Renewable energy resources are still relatively new, which means they are relatively expensive. For industries that do transition into lower emissions and follow cap rules, there is a good chance that the products that they produce are going to be more expensive in the future. These higher prices get passed along to the consumers, who ultimately won’t have as much discretionary income to spend.

7. Different nations may have different standards as to what a maximum cap should be.
The amount of industry which occurs in the United States is different than the total industry that occurs in South Africa. Some nations create more emissions than others. This means a maximum cap will be defined differently in every society. Some may be very lenient about emissions caps and credits. Others may be very strict.

The Cap Trade System is One of the Best Ideas Available Right Now to Help Limit Emissions.

This doesn’t mean the system is perfect. It’s just the best idea we’ve got at the moment. It’s based on capitalistic tendencies, puts the environment first, and could provide some economic benefits. By evaluating all of the cap trade pros and cons, the best possible system can be created.