The real purpose of “cap and trade” schemes is to make greenhouse emissions standards (’caps’) more palatable to profitable, politically influential polluters by giving them a way to avoid changing for as long as possible (’trades’). A simple carbon tax, with tax credits for conversion to cleaner technology, up would be much more effective.
Because we’re talking about the intersection of money and pollution, these schemes place businesses in one of four categories based on their profit margin and greenhouse emissions. By looking at the four types of companies, we can see their likely response to a cap and trade system as they pursue profits under the constraints of the system.
|
Under Cap |
Over Cap |
| Profitable Company |
- Sell Credits
- Continue to Pollute
- Subsidy
- No penalty for emissions
|
- Buy Credits
- Continue to Pollute
- Penalty only for emissions over cap
- Invest in polluting
|
| Struggling Company |
- Sell Credits
- Continue to Pollute
- Subsidy
- No penalty for emissions
|
|
We can see that the plan is good for clean companies. They can sell credits to polluters. For these companies, there is no incentive to reduce emissions until the cap reductions affect them. In fact, the option to sell credits is a government subsidy to these types of companies born by taxpayers as an opportunity cost. Since any level of greenhouse emissions are dangerous, and the effects of pollution are born by taxpayers, taxpayers are paying companies under the cap to pollute. However, as the standards get tighter, these companies will be forced to the right.
For companies that are over the cap, there are two types. Companies that cannot afford carbon credits will go out of business. Good, less polluters, right? But are we sure these are the businesses we want to shut down? This outcome hasn’t been arrived at by an analysis of other environmental impacts of the company - just the face that they are polluters now, can’t afford to retool, and can’t afford carbon credits. An environmental and social problem has been answered through a financial / market process.
On the other hand, very profitable companies buy credits and continue to pollute. They only have to buy enough credits to cover their pollution over the cap, and they can afford to. They prolong retooling for fewer emissions, instead investing in carbon credits as long as possible. After all, company wouldn’t buy the emissions credits unless it was a good investment - meaning, the result of polluting behavior is net profitable even with the cost of credits, and this investment opportunity is brought to them by the largess of the taxpayer, again in opportunity costs for repayment of the impact of the emissions. We have given them a perverse incentive to pollute as long as possible.
An emissions tax with retooling credits, only the other hand, is a simpler and more effective solution. Because all emissions are harmful, not just those coming from the portion over the cap from companies who total emissions are over the cap, all emissions should be taxed. The incentive to clean up is spread evenly on companies regardless of how much money they make. Some companies will, and should, go out of business, but those companies are more likely to be the biggest polluters, rather than polluters who happen to be in low-margin businesses. Tax credits should be made available to companies that invest to reduce their emissions.
Finally, cap and trade represents the rhetoric of the past where free markets are assumed to be the answer to the every problem. We have seen that markets do not encourage forward thinking long term solutions, but rather profit maximization for the increment of time between now and the next bonus.
With what we know, relying on companies to act responsibly is irresponsible.
