When a cap-and-trade system stops biting

The relative merits of cap-and-trade versus a carbon tax for pricing carbon have been discussed here before. One characteristic that was not mentioned, and which is a blow against cap-and-trade, has to do with incentives to go beyond the minimum. Specifically, when the government sets a cap and auctions permits, you can be pretty sure the actual level of emissions will not fall lower than the cap. If it did, the market price for permits would plummet and people would rush in to buy the right to pollute.

A carbon tax wouldn’t have this problem, since people would be paying for every tonne of emissions, regardless of where the whole country was relative to the target. Also, a cap-and-trade system could probably be designed in a way that eliminates or eliminates this problem. For instance, the government could mandate a price floor, below which point permits are automatically withdrawn from sale.

Personally, I think it is possible to design either system well. It would also be possible to use an alternative cap-and-dividend or fee-and-dividend system, with automatic recycling of revenues. The key thing is to put a price on carbon domestically, and do so in a way that can eventually be integrated with systems elsewhere. By itself, carbon pricing won’t be enough. The volume of coal and unconventional fossil fuels out there makes them too dangerous to allow continued growing use. Before carbon prices, I would be happier to see both developed and developing states adopt moratoriums on new coal-fired facilities, except perhaps those that actually capture and store the great majority of their greenhouse gas emissions.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here.

37 thoughts on “When a cap-and-trade system stops biting”

  1. There is also the nationalize-and-shut-down approach, which some economists have thought to be cheaper than any market based option – even when including the cost of building the alternative power sources.

  2. As before, not in the cards politically and far from guaranteed to work. Governments care way more about jobs today than about the welfare of people in fifty years.

  3. Ok – you’re right. But not for the reasons you state. Nationalization is a huge job creator. Depression? CNR?

    Nationalization means we could build the carbon neutral energy sector much faster than the market could – with it’s quarterly-income mindset. You think the 4 years politiciens get makes them short sighted, compared to businesses (with low average CEO tenures), 4 years is an epoch.

  4. I think it is safe to say that no Canadian politician with a shot at power, and no member of the civil service, has the slightest chance of suggesting such an approach. Even de-linking energy utility profits from sales volumes is too shocking to be within the realm of consideration.

    And, again, there is no reason whatsoever to expect the government to focus on emissions cuts if it nationalized the sectors with major emissions.

  5. The near-term situation looks like this:

    1) Canadians in general are not demanding action on climate change. If anything, there is a desire to be seen as doing good things internationally, and a willingness to take trivial steps to achieve that.

    2) Canadians who do want action are easily tricked by things like targets with no plan to follow through.

    3) The government is not seriously concerned about the present or future impacts of climate change.

    4) They are concerned about the export implications of carbon pricing regimes elsewhere, especially in the United States.

    5) The lesson learned from Stephane Dion (whether rightly or wrongly) is that carbon taxes are a political loser in Canada, even when the revenue is recycled.

    As such, it seems likely that the only reason Canada will create any kind of serious climate change mitigation system is to avoid border tariffs from the US. We will do so grudgingly, cheating in every possible way. Given how Obama has been castrated, such tariffs may not emerge for years. That is especially true if he gets walloped again in the mid-term elections, and/or the next presidential race.

  6. As you say “The key thing is to put a price on carbon domestically, and do so in a way that can eventually be integrated with systems elsewhere.”

    For cap and trade, cap and dividend or carbon tax to work globally there needs to be agreement either about how to share the limited allowable carbon emissions between sovereign nations or about how to share the trillions of revenue from an international tax or auction of allowances. Neither seems likely to happen any time soon if ever.

    I have a simple, effective and popular solution.

    In a recent Times Online live debate see


    85% voted that “Fossil fuel companies should be obliged to sequester an increasing fraction of the carbon content of the products they sell to avoid dangerous climate change”. For details on why this proposal would be easier for all countries to agree to than cap and trade or carbon tax, how it would drive energy saving, renewables and nuclear, how it would be implemented and how it would stop global warming see my website at


    When fuel producers are obliged to place contracts for carbon capture and sequestration for a proportion of the carbon in their fuel, as I propose, I think there will be power companies from around the world competing to take their money. I hope we will be left wondering what all the fuss around cutting emissions was about.

  7. 1) Carbon capture and storage cannot collect 100% of the emissions from even the most promising facilities (fixed facilities close to potential reservoirs, with high CO2 concentrations in their emissions).

    2) It cannot be used for emissions from vehicles.

    3) It is not yet known whether it is safe, effective, or affordable. Nor is it known how quickly it could be deployed.

    I personally hope CCS will work, but we cannot bet on that and we certainly cannot assume that it will be a silver bullet. At best, it will be one approach among the many that are required.

  8. Recent reports from the World Future Energy Summit
    say that “speakers pointed to the maturation of CCS and many successful pilot facilities around the world. And they set the expectation that the industry is now ready to see production facilities built in large numbers.”

    The International Energy Agency (an intergovernmental organisation) say that stabilising climate in 2050 will cost at least 70% more without carbon capture.

    It is impractical to capture carbon from vehicles but it is not impractical to power them with electricity generated with carbon capture. There will remain a few applications such as transport and heating in remote areas and aviation for which mains electricity cannot be used and I do not advocate increasing the cultivated area to provide biofuel. But the downwelling polar currents will continue to move about 6% of today’s emissions to the deep ocean for over a thousand years and this could allow limited emissions for these difficult applications.

    The percentage of carbon dioxide that can be recovered depends on the process and the financial incentive. I agree it might be very expensive to get high recoveries post combustion with air but combustion with pure oxygen is less restrictive. My own experience is with reforming and partial oxidation of natural gas to make carbon monoxide and hydrogen at a scale of hundreds of tonnes a day and we certainly managed to capture virtually all the carbon dioxide. There is no thermodynamic limit; the minimum thermodynamic energy required to separate and liquefy pure carbon dioxide from the atmosphere is less than 8% of the heat released when burning the carbon.

  9. Carbon capture and storage definitely cannot be the whole solution. Neither can just cap-and-trade. Governments are going to need coordinated suites of climate mitigation policies, if we are going to get global emissions on the kind of downward trajectory that is required to avoid dangerous anthropogenic interference in the climate system.

  10. As for nationalization, nationalized oil and gas companies are a big part of the problem right now. Them – not the major international oil companies – control the bulk of the world’s fossil fuel resources. And the state oil companies of Saudi Arabia, Russia, and Venezuela certainly aren’t going to willingly allow themselves to be restrained by carbon prices, or any other mitigation policy.

  11. RK,
    You say “Carbon capture and storage definitely cannot be the whole solution” without saying why not or who said it could.

    I say if you capture the carbon you burn, the problem is gone and if you don’t it hasn’t. The issue is how to do it and how to make it happen and that is what I am trying to tell anyone who will listen.

    The missing element was how to persuade drivers to switch to electric vehicles (if battery life, cost, range and recharge time do not improve substantially) without massively increasing the fuel price and distorting the rest of the market. But I now believe I have a simple, practical and economic way of capturing carbon from vehicles and will publish my ideas on my website


    after I have filed the patent application.

  12. OK. Here are some reasons:

    1) Power plants using CCS need to burn more coal to run the CCS equipment. We will therefore be even more vulnerable when fossil fuels run out.

    2) CCS doesn’t capture 100% of the greenhouse gases in plant emissions.

    3) It doesn’t work for mobile sources.

    4) Putting one gigatonne of CO2 underground per year would require as much downward injection equipment as is currently being used to bring oil up, and solving the whole problem would require sequestering much more than that.

    5) That oil infrastructure cost billions, and took decades to deploy.

    6) There is no guarantee that CCS will be able to keep those emissions underground indefinitely.

    7) CCS does nothing about the many other contaminants released by power plants.

    8) If CCS leaks into groundwater, it could produce acid that generates larger releases.

    9) If lots of CO2 gets to the surface, it can kill all animal life there.

    10) We have no idea how much even a small amount of CCS would actually cost. Just switching to renewables may be far cheaper, while also freeing us from fossil fuel dependence and the poisons produced by burning them.

  13. Al Gore is also concerned about the sheer volume of CO2 that would need to be injected:

    “If all the CO2 now being vented into the atmosphere by U.S. coal electricity plants were captured and converted into its liquid form, the volume would be equivalent to 30 million barrels of oil per day – three times the volumes of all the oil imported by the United States each day. If the CO2 were then transported by pipeline to repositories, as proposed, the amount (by volume) would be one third of that of all natural gas now being transported in pipelines throughout the U.S”

  14. Cambridge Don David MacKay also makes a good point about the limited usefulness of coal-with-CCS:

    “Let’s repeat his calculation for the world as a whole. In 2006, the coal
    consumption rate was 6.3 Gt per year. Comparing this with reserves of
    1600 Gt of coal, people often say “there’s 250 years of coal left.” But if
    we assume “business as usual” implies a growing consumption, we get a
    different answer. If the growth rate of coal consumption were to continue
    at 2% per year (which gives a reasonable fit to the data from 1930 to 2000),
    then all the coal would be gone in 2096. If the growth rate is 3.4% per
    year (the growth rate over the last decade), the end of business-as-usual is
    coming before 2072. Not 250 years, but 60!”

  15. As for your mobile system:

    Remember, CO2 is 12 grams per mole of carbon and 32 grams per mole of oxygen. The carbon comes from the fuel, the oxygen comes from the air. As such, your CO2 wastes are going to be heavy and voluminous.

  16. RK,
    Some responses to your many comments

    1. To date we have used only one thirteenth of the fossil fuel on the planet
    2. Capture percentage depends on the process and the financial incentive. See my earlier comment.
    3. Vehicles can run on electricity generated with carbon capture.

    4 and 5 Energy is a big business so all the potential solutions are big. The scale argument is no more valid here than when used against windmills, solar or nuclear though I think the argument has weight when applied to biofuels. The reason we started on fossil fuel is because there was not enough biofuel. Here in Sussex we lost the iron industry during the industrial revolution when we ran out of trees to make charcoal and the industry moved on elsewhere using coal.

    6 The IPCC say that it is likely that over 99% of CO2 will be retained underground after 1000 years. Cap rocks keep CO2 in just as they keep gas and oil in.
    7 All the other flue gas contaminants are captured upstream of carbon capture.
    8 Do you mean carbonic acid? How does that generate larger releases?
    9 Lots of CO2 won’t get to the surface but anyway I don’t understand why you think it’s worse to bury carbon dioxide 1000 metres or more underground than to spew it straight out of every chimney.
    10 Plenty of people have estimated the cost of carbon capture and sequestration and quite a few are doing it, though not yet on a large power plant. The International Energy Agency (an intergovernmental body)
    have said that achieving climate stabilisation in 2050 will cost at least 70% more without carbon capture and that the power sector will need to be largely decarbonised by then. Carbon capture is therefore an essential part of the most economic solution.

    If carbon capture is driven by cap and trade or by obliging fuel producers to pay for the capture of an increasing proportion of the carbon in their fuel as I advocate, it will substantially enhance the economics of energy saving, renewables and nuclear. It is therefore most unlikely that fossil fuel consumption will continue to grow at all, particularly coal whose price would increase dramatically. Charging carbon capture at a typical $75/tonne of carbon dioxide works out at $275/te of contained carbon compared to an average spot Appalachian price in 2008 of $116/tonne. Of course you can always make silly numbers by compounding growth. For example 100 years growth at a modest 3% per year gives a 19-fold increase.

  17. To date we have used only one thirteenth of the fossil fuel on the planet

    According to the estimates of the International Energy Organization, we have burned about 1/3 of all the world’s oil, 1/4 of the gas, and 1/3 of the coal:

    It should be noted that the IEA figures for total reserves are rather suspect, and may be far too high. This is because they are based on projected demand, not geological analysis.

    Even the IEA is now expressing concern about peak oil. Even ‘peak coal’ is not an unknown concept.

    I think CCS would, at best, buy us a few decades of low-carbon energy, provided economic growth continues. We certainly need to be looking at longer-term solutions, as well. Also, our global economy must eventually be in a steady state, in biophysical terms.

  18. I guess your numbers refer to proven reserves while mine include what is likely to be there. BP statistical review http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2009_downloads/statistical_review_of_world_energy_full_report_2009.pdf
    has proven coal reserves of 826 giga-tonnes for example.

    I have no link for the source of my “thirteenth” quote which was based on global remaining fossil fuel carbon of 4000 giga-tonnes but page 3 of Geoengineering
    the climate gives similar numbers and is available as a download at

    Of course fossil fuel cannot continue to supply most of our growing energy needs indefinitely but my point is that for as long as it does we must capture the carbon and to make that happen soon we need a workable financial incentive scheme such as the one I proposed above. Cap and Trade will not deliver.

    Coincidentally because my proposal will add to the cost of burning fossil fuel it will encorage alternatives and thereby extend the life of our reserves.

  19. You are assuming that if we convert to electric vehicles powered by CCS power plants, people won’t burn the oil that we aren’t using somewhere else. That seems awfully unlikely. Firstly, oil producing countries generally provide extremely cheap fuels to their citizens as a way of keeping them happy. That would become easier if demand from rich countries dropped. Indeed, the reduced demand would cut prices everywhere and encourage people to substitute oil for other sources of power.

    In the long run, it is probably inevitable that all the easy-to-reach oil will be burned somewhere. What we really need to do is keep people from fully exploiting coal and unconventional gas resources.

  20. My proposal obliges fuel producers to pay for carbon capture so it makes no difference who buys the fuel off them. There are specific proposals to deal with countries or companies cheating by consuming their own fuel without paying for carbon capture see
    “Enforcement is straightforward and does not rely on the co-operation of every country. The contracts would be traded and recorded centrally, mostly placed and paid for by the international energy companies. If countries were uncooperative and used their own fuel internally without contracting for carbon capture, a central monitoring organisation could impose an increased capture proportion on imports or exports of fuel for that country to compensate.”

    I can think of no significant player who would not be caught by this provision.

  21. If countries were uncooperative and used their own fuel internally without contracting for carbon capture, a central monitoring organisation could impose an increased capture proportion on imports or exports of fuel for that country to compensate.

    What does this mean?

    Let’s say Saudi Arabia, Venezuela, Canada, Kuwait, the UAE, etc all refuse to participate in your scheme. China, India, and others also refuse to sign up, and insist they can buy fossil fuels from whoever they like.

    Even if you apply CCS to 100% of stationary sources in the countries that might sign up (European counties, Japan, etc), you will not have solved the problem.

  22. If you can get the big producers and consumers of fossil fuels to play along in good faith, you have already basically solved the problem. From that point forward, you can use any number of instruments: cap-and-trade with a hard cap, a rising global carbon tax, etc.

    What this CCS plan does it take all the difficulty involved in getting all parties on side, then adds all the risk and uncertainty associated with CCS technology. As has been stressed above, we cannot yet be confident that CCS will be safe and effective, and all indications so far show that it will be very expensive.

  23. Milan,
    Well it wouldn’t matter much if Saudi Arabia, Venezuela, Canada, Kuwait, the UAE didn’t sign up as long as their customers did. But Saudi Arabia and Canada are keen exponents of carbon capture. They realise that fossil fuel demand cannot be sustained without it and as demand falls so will prices.

    If China and India did not join in and teamed up with a few oil exporting countries they could get round the enforcement mechanism but why would they? Unlike cap and trade or national carbon taxes the scheme requires no national emission limits leaving China and India free to continue to massively outgrow the more mature world economies. China and India would also be very well placed to benefit from the contracts for carbon capture because they are building many new power stations, steel works and cement kilns and it is obviously easier and cheaper to incorporate the technology in a new build than in a retrofit.

    My scheme does not only enforce carbon capture it will also increase fossil fuel prices in proportion to their carbon content and thereby work to discourage their use in all applications in exactly the same way as a carbon tax or cap and trade. Domestic and industrial heating can relatively easily switch to use low carbon electricity but as you say mobile sources are more problematic.

    It would be great if the range, performance, battery life and initial cost of electric cars improved to the point where we all bought them, but that might be like waiting for fusion power. I for one would not voluntarily abandon my car even if gasoline price rose to £5/litre, although I might get a more economical one. I doubt if there is space on the planet to grow enough crops for biofuel for everyone and anyway it would raise all sorts of issues about habitat destruction, displacing food crops for the poor etc.

    Capture from the atmosphere becomes economic at much lower prices than that. For example ocean quicklime addition would work at 50p/litre, see my March 28th 2009 comment at http://www.cquestrate.com/the-idea/detailed-description-of-the-idea and there may well be similar land based approaches that are almost as cheap and less environmentally threatening. My proposal would fund such schemes if they were the cheapest means of additional carbon capture on offer.

    I have also developed a workable scheme to capture CO2 directly from the exhaust of vehicles and will publish details on my website as soon as I have filed the patent. I have no scheme to capture emissions from aircraft but the oceans will continue to remove about 6% of today’s emissions to the deep ocean in the downwelling polar currents for over a thousand years and aviation currently accounts for only 2% of emissions. See

    As I said earlier in this thread, ” For cap and trade, cap and dividend or carbon tax to work globally there needs to be agreement either about how to share the limited allowable carbon emissions between sovereign nations or about how to share the trillions of revenue from an international tax or auction of allowances. Neither seems likely to happen any time soon if ever.”

    And as I pointed out earlier, “if you capture the carbon you burn, the problem is gone and if you don’t it hasn’t”, it makes no difference how many windmills you build. This is not an opinion it is a logical truism. CCS is not an optional extra if you want to use fossil fuel. And the chance of persuading the world to stop using fossil fuel in the foreseeable future are nil.

  24. But Saudi Arabia and Canada are keen exponents of carbon capture.

    This is for two reasons:

    1) Supporting a technology that doesn’t exist yet lets them off the hook, when it comes to taking any immediate actions.

    2) The cheap miraculous imaginary version of CCS lets them pretend that they can dig up all their fossil fuels without climate consequences.

    As it stands, CCS is a kind of phony argument against taking action and against any sort of anticipated restraint in the future.

  25. For cap and trade, cap and dividend or carbon tax to work globally there needs to be agreement either about how to share the limited allowable carbon emissions between sovereign nations or about how to share the trillions of revenue from an international tax or auction of allowances.

    This isn’t true.

    Every state can establish their own carbon pricing scheme. Then, if they wish, they can impose carbon tariffs on imports. Alternatively, they could only put tariffs on imports from states that don’t have pricing schemes they consider adequate.

    By forcing everyone to rely exclusively on CCS, you create many problems and risks, as described above. It may turn out that CCS works well and is affordable. If so, it will become common under any carbon pricing scheme. The big risk is that if CCS doesn’t pan out, your plan would leave the world with even more wasted years before effective actions were undertaken.

  26. Milan,
    You say “technology that doesn’t exist”. Dakota Gas has been sequestering carbon dioxide captured from the partial oxidation of coal with pure oxygen since 2000, currently at the rate of 3 million tons per year.
    Their main end product is methane not hydrogen or carbon free electricity, but it could be with the addition of a well-established step to shift carbon monoxide to CO2 and hydrogen. Indeed there is an option to do just that in their ammonia plant, but I am not sure that they are operating that unit at the moment. http://www.dakotagas.com/Gasification/Ammonia_Plant/index.html

    GE say the technology is ready now and I think they should know http://www.huffingtonpost.com/monte-atwell/the-puzzle-of-coal-americ_b_460140.html

    You say “The cheap miraculous imaginary version of CCS lets them pretend that they can dig up all their fossil fuels without climate consequences.”

    CCS is not imaginary or cheap but it is very affordable. UK emissions in 2008 were 581 million tonnes of CO2. UK GNP was $2.22 trillion. Even if capturing or preventing the emissions cost $75/tonne, that is still less than 2% of GNP (less than a year of typical growth).

    You say “Every state can establish their own carbon pricing scheme. Then, if they wish, they can impose carbon tariffs on imports. Alternatively, they could only put tariffs on imports from states that don’t have pricing schemes they consider adequate.”

    I say that does not limit emissions. It might discourage them a bit in countries that did it, but no more so than raising the fuel price through my proposal, which incidentally avoids all the complex bureaucracy of your variable import tariff plan.

    But when carbon is captured the reduction in emissions is inescapable.

    The world has spent twelve years since Kyoto was adopted failing to reduce CO2 emissions. It was agreed at Copenhagen that global warming should be limited to 2C but we are further than ever from agreeing how to share the massive implied emission reductions between nations. Future generations will find it comical that we persisted for so long doing the same thing over and over again expecting a different outcome, when there was an eminently easier way.

  27. I feel like we’re just talking in circles here.

    You think CCS will be affordable and great. I think it’s too much of a gamble to use as the primary plank in our mitigation strategy.

    Time will tell how effective CCS really is, and how feasible it will be to deploy commercially.

  28. “To be fair, Hansen has made an interesting moral argument against cap and trade, one that’s much more sophisticated than the old view that it’s wrong to let polluters buy the right to pollute. What Hansen draws attention to is the fact that in a cap-and-trade world, acts of individual virtue do not contribute to social goals. If you choose to drive a hybrid car or buy a house with a small carbon footprint, all you are doing is freeing up emissions permits for someone else, which means that you have done nothing to reduce the threat of climate change. He has a point. But altruism cannot effectively deal with climate change. Any serious solution must rely mainly on creating a system that gives everyone a self-interested reason to produce fewer emissions. It’s a shame, but climate altruism must take a back seat to the task of getting such a system in place.”

  29. Carbon taxes can also stop biting:

    Another, related problem is that the best carbon tax of all raises no revenue: in other words it is so effective at changing behaviour that the economy really does move into a glorious green future in which no (or hardly any) greenhouse gases are emitted. This is a problem with all Pigovian taxes, or at least it’s a problem for governments that rely on them for revenue. The RAC Foundation, a motoring lobby group, reckons something similar is already beginning to happen with fuel duty in Britain—it is set so high that consumers are increasingly choosing small, efficient cars, lowering the revenue that the tax produces.

  30. If by “biting” you mean “taken up by the existing power structure”, then sure, they never started biting.

    If by “biting”, on on the other hand, you mean “can be forced upon them by popular movements”, then we have to talk about how the biting starts.

  31. The article isn’t making reference to either of those things – just pointing out that it is possible that the economy will eventually be zero-carbon by default, because that is the way technological development and capital investment have gone.

    At that point, emissions would stay at zero regardless of the level of the tax.

    Naturally, that isn’t an outcome that there is any reason to worry about. Rather, we should worry about the numerous reasons for which we might never get there.

  32. Indeed, the article linked above points out for getting the UK to meet the government’s GHG reduction target could require a very high carbon price indeed:

    The latest target is a 34% cut, compared to 1990 levels, by 2020… When the good folk at Cambridge Econometrics fed this requirement into their model, it began spitting out prices of many hundreds of pounds per ton, far beyond anything that could be seen as politically plausible by even the most starry-eyed environmentalist. Indeed, the prices were so high that they were pushing up against the limits of the model, and any numbers generated would have to be taken with a big dollop of salt. The main reason, said the firm’s analysts, was the time it takes to do things like building nuclear power stations and converting large chunks of Britain’s transport to run on electricity. It just isn’t possible to do enough in a decade, no matter how high you crank the carbon price.

    There is no shortage of reasons for thinking humanity is in big trouble.

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