In the mid-twentieth century, economists hit on a new idea for controlling environmental pollution. Rather than forcing companies to adopt strict emission regulations – which could harm energy suppliers financially and put a greater strain on consumers’ wallets – the government could issue a sin tax for pollution, much like it does for alcohol and tobacco. Experts in Canada and the United States developed this concept in the 1960s, but it was not until acid rain became an issue in the 1990s that it was put into action.
The system that would become known as cap-and-trade worked like this: The government, under President George Bush I, would impose a limit on the amount of gases that power plants and refineries could emit. To cut down on sulfur dioxide emissions (one of the main ingredients for acid rain), as well as other harmful atmospheric pollutants, emissions trading became law under the Clean Air Act of 1990. When cap-and-trade took effect in 1995, nationwide acid rain emissions dropped by 3 million tons in that year alone. The program was hailed as a great success.
Cap-and-trade is now being applied to greenhouse gases, with mixed responses from environmental groups. Criticism of the strategy arises from the fact that companies set their own emission standards – the idea being that the government will issue permits equal to the submitted emissions and gradually reduce the volume of emissions over time. But this creates a market for pollution rights, and has allowed companies to overstate their emissions for the right to pollute more.
With this in mind, California took several years to develop its regulations before implementing a cap-and-trade system in 2013. Despite measures taken to smooth the transition process, California’s carbon price is still the highest in the world, at $11 per ton. That’s 60 percent above the average European rate. To avoid the fraud that plagues other cap-and-trade systems, the state spent years getting accurate emissions data. Finally, to promote efficiency, it has allowed companies (both domestic and out-of-state) to develop “offset projects” that can be sold in the California market.
One such example is John T. Pagel, of Pagel Dairy Farm in Wisconsin. In partnership with San Francisco company TerraPass, Pagel developed a system to capture methane emissions from the manure of his cows. TerraPass supplied the funding and California monitors the system like a hawk, issuing carbon credits so long as everything works the way it’s supposed to.
Innovations such as these are important stepping stones in fighting climate change, but cap-and-trade has yet to stop global emissions from rising. Experts like Doreen Stabinsky, a Professor of Global Environmental Politics at the College of the Atlantic, would prefer a different system altogether, one that does not reward pollution.
“I would throw the markets out and start over with something different,” she says. “I think we can’t be sidetracked by playing around with a market, because this objective is so important, so pressing and so difficult.”
California has been practicing its meticulous cap-and-trade for 18 months now and will begin imposing it on fuel suppliers next year. By the end of the decade, the system will grant the state an estimated $5 billion per year in permit fees. But how much it will truly benefit the environment is unknown.