An exciting element of the new American administration’s climate change agenda is the promised cap-and-trade scheme for greenhouse gas emissions. During the campaign, Obama pledged that the system would auction 100% of the permits. The government would issue a set number of permits each year, which firms would need to bid for competitively. That way, the price of permits would be established through a market mechanism and whatever opportunities existed to mitigate emissions for a lesser cost would be captured. The revenues from the auctions could be used in various ways.
One big rhetorical counter-argument, employed largely by those seeking to stall the regulation of greenhouse gasses, is that this will increase consumer prices. At least when it comes to greenhouse gas intensive products, this is necessarily true in the short to medium term. The whole idea behind carbon pricing is to alter the relative cost of high-carbon and low-carbon goods: encouraging people to switch from the former to the latter, and generally minimize the consumption of high-carbon goods altogether. Prices are an important mechanism through which this information is conveyed. Also, the existence of a significant and rising cost of carbon is necessary to drive the kind of investments required to produce a low-carbon society.
There are a number of important responses to the point about raising prices. Firstly, it is important to highlight how the transition to a low-carbon economy is necessary and one-off. Putting society on a sustainable footing is a huge task, but also one of humanity’s biggest opportunities. Managed properly, our response to climate change can establish key parts of the foundation for a sustainable society. Secondly, it is key to realize that energy companies will pass along the cost of permits, even if they receive them for free (this previous post explains why). This leads to the third point, about the importance of where the funds go. In a system where permits are ‘grandfathered’ and given to power plants and industrial facilities for free, the price increases will translate into profits for those polluting firms. Cap-and-trade revenues, however, go into the public coffers. They can then be used to help individuals deal with the difficulties of economic transition, reduce taxation elsewhere, and help fund green infrastructure projects.
The 100% auction plan is certain to face stiff opposition in Congress. In spite of that, it is very much worth putting through. It is far better to get a weak but decently-designed system in place, ready to be tightened up later, than introduce something that is compromised from the start. Putting a small but real price on every tonne of emissions is thus better than entrenching a system of free emissions for favoured firms, even if non-favoured firms face higher initial carbon prices. Here’s hoping the Obama administration has the resolve and skill required to really kick off America’s urgent transition towards carbon neutrality.




