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3. Cap and Trade: The Tangled Web… A More Effective Alternative

In Part 1, I offered a critique of cap and trade in its existing implementations and located key flaws which make it highly unlikely that it will achieve its emissions reduction goals, even if somehow it is strengthened. In part 2, I highlighted two problematic aspects of cap and trade and then went on to examine what are the fundamental challenges of climate policy. Then I offered a list of the general features of any effective climate policy.

Turning to positive solutions rather than criticsms, I will offer here two main options, the first one mainstream and the second heterodox and project-based; both of which are easily configured for quicker and more certain emissions reductions than via cap and trade.

Comprehensive Climate and Energy Policy Package with Carbon Tax/Fee

Climate policy has emerged with a focus on markets and changing market behavior (ignoring infrastructure development to a large degree), so the “mainstream” approach below would also transparently give responsible parties control over the process. While the “one-stop shop” aspect of cap and trade overextends this already misapplied policy, a package of interacting measures that are, with fairly straightforward calibrations, guaranteed to cut emissions quickly can easily be put together. The below policy package avoids handing off climate and energy policy to an unaccountable carbon market and invite undue influence by financial traders. It also has the potential to be much more effective than a cap and trade centered policies. On the other hand it is “market-based” in that it relies on the more accurate carbon tax/fee price signal to shape market behavior rather than cap and trade’s muddy signal.

1) Emissions-Reduction Path with Targets: Set an emissions-reduction path with target goal posts (2015, 2020, 2025, etc.): Not the reassuring “cap” metaphor but an analog to the cap without the false reassurances that it contains. The target or path could be expressed in terms of an average carbon-intensity for economic activity that yields the same path. Using a carbon-intensity target allows adjustments to be made so efforts to cut emissions do not shut down industries before they are able to transition to lower carbon alternatives. I would recommend the “emergency pathway” as defined by Greenhouse Development Rights that uses the 350 parts per million carbon dioxide target, though others may object to its ambitious goals.

2) Carbon Fee or Tax: Set a carbon price in the form of a carbon fee or tax fixed but rising year by year that will, according to at first estimates and then experience, reduce emissions along the path. If the tax does not yield the necessary cuts, increases in the tax/fee levels will be accelerated. A tax or fee enables companies to calculate the value of carbon emissions and make the actual investments that will cut emissions rather than deal with a broad range of expected carbon permit values, as would result from cap and trade.

  1. Calibration – A carbon tax would be calibrated to achieve the emissions targets along the path in bullet “1” though overachieving will be encouraged. If tax levels inflict damage on economic well-being or capacity, tax levels may be reduced, though it is to be expected that there will be periods in which some economic pain will be inflicted by the tax to encourage better economic decision-making and innovation. Expectations need to be set from the outset that some pain is involved in transitioning to a more sustainable economy, though excessive pain is to be avoided.
  2. Revenue stream – There are arguments among tax/fee advocates (as well as cap and trade advocates for the revenues from permit auctions) about where the revenues should go. Here are my recommendations:
    1. One third of the carbon tax revenues should be used to dampen the effects of the costs of rising energy prices on the poorest, preferably via energy efficiency upgrades to housing (modeled on weatherization programs).
    2. One third should be used to help fund infrastructure that enables a zero carbon future (electric trains, electric transmission)
    3. One third will go into a international carbon trust which will fund development products, changed agricultural practices, forest maintenance and growth efforts with strict performance standards and baseline assumptions.
  3. Exemptions and Credits – Some argue against any exemptions and credits, seeing a flat tax as simpler. However, I, as an example, believe taxing certain activities that cut carbon is counterproductive. Additionally I want to show that it is possible to develop and regulate cross-border certified emissions reduction credits in a tax system if such a credit sub-system ends up being desirable. I believe however that these necessary accommodations to the complexity of the situation are much more transparent and can lead to more productive dispute resolution than via the arcana of the trading system.
    1. It makes no sense to levy the full carbon tax level on the very infrastructure projects that lead to carbon neutrality. If a construction project embeds fossil emissions in a zero-emission technology (electrification of a train system, renewable energy infrastructure), then the emissions from construction equipment or concrete making for that project should be at least partially exempt. Alternatively there could be a percentage exemption depending on the level of carbon reduction achieved (coal to natural gas conversions).
    2. Just as with the current offset market it might be made possible to sell certified emissions-reduction credits that represent emissions reductions in other areas or other countries. These credits would need to be rigorously certified and limited to only a certain fraction of carbon tax liability.

3) International Agreements – Utilizing existing international institutions, nations around the world can come to agreements on both monetary fees for carbon emissions and overall emissions reduction targets. The addition of a monetary amount will force action by governments and businesses more rapidly than the abstractions of the carbon market. Agreements will focus on:

  1. Worldwide Emissions Targets and Path
  2. International Carbon Price(s) – Calibrated to achieving emissions targets, the international carbon price will be closer to actual microeconomic decision-making than permit pricing system of cap and trade. Choices are either a unitary price or a development-adjusted price depending on level of development. Some countries may be more “entitled” to pollute given their lesser historical contribution to total atmospheric concentrations of carbon. On the other hand, despite an “entitlement” to pollute more, some developing countries may want to go “cold turkey” and use the higher carbon tariff of the developed countries to spur sustainable development at home.
  3. Carbon tariff regime – with differential taxation in different countries, countries would levy tariffs upon importation either up to the amount of the unitary international carbon price or up to the amount of the development-adjusted carbon price. While this contradicts “free trade” orthodoxy, under an international agreement there should be no problem in levying this type of tariff. The WTO can be outfitted to handle disputes and generating agreements carbon tariffs and integrating climate policy with trade.
  4. International Standards and Best Practices – Agreement on standards, certifications, and grading systems for energy efficiency and low emissions technologies (see below)

4) Zero-Carbon Infrastructure Development– While the Obama Administration has embarked on pieces of this, a full-scale climate policy would front-load spending, including deficit spending, on building zero-carbon infrastructure and energy generation. The main source of funding would come from tax revenues and use fees. This area is largely neglected by the cap and trade instrument.

  1. Renewable Energy Supergrids and regional grids – Link high renewable energy areas with demand centers via development of a HVDC and where appropriate high voltage AC transmission.
  2. Renewable Energy Zones – Expedite environmental impact studies for high value renewable energy zones with strong sun, wind, geothermal resouces.
  3. Feed-in-Tariffs – Funding of private, community and household investment in renewable energy generators via clean energy surcharges to electric bills.
  4. Electric Freight Transport System
    1. Grade-separate and improve existing freight railbeds
    2. Add additional tracks to high traffic railbeds to allow more rail freight
    3. Electrify all high and moderate traffic rail routes
  5. Electric Passenger Transport System
    1. Build high speed rail backbone
    2. Enable improved track-sharing between freight and passenger traffic for lower-traffic routes.
    3. Build electrified bus and tram routes in high density/high-traffic city environments.
  6. Electric Vehicle Recharge Infrastructure
    1. Trickle charge (220V and lower) public charge network
    2. Battery-swap infrastructure
    3. Fast-charge (480V and higher) public charge network

5) Best Practices, Certifications, Standards and Rulemaking– Develop for most economic sectors, a set of best practices and standards that are based on cutting emissions as well as other elements of sustainable development (conservation of the earth’s natural wealth). Standards would be either voluntary or mandatory depending on the level of imposed costs of meeting these standards by market participants and the existence of alternatives to meet the overall goals of the standards. Rigorous standards like the passive house standard should be encouraged as well as graded standards that represent a “path” to carbon neutral solutions. In certain vital areas, standards may be come laws to rule out certain practices that are simply unacceptable. An example of the latter could be a moratorium on new coal power plants.

6) International Afforestation Program – Using revenue streams from carbon fees and tariffs, generate local solutions to maintaining living biomass. Carbon taxes or other disincentives may be levied on activities that release excess carbon into the atmosphere.

7) International Agricultural Carbon Sequestration Program – Using revenue streams from carbon fees, incentivize low-emission, high sequestration variants of agriculture and food practices. In the future, once a baseline for carbon sequestration may be achieved, carbon taxes may be levied on high emission forms of agriculture.

8) Black Carbon Reduction Program – One of the more tractable climate problems though still a challenge is to introduce existing emissions control technology or develop alternatives to combustion of hydrocarbons and biomass that produce soot or black carbon. We already have most of the technology to limit soot emissions from internal combustion engines and factories. More challenging is coming up with culturally-acceptable solutions for cooking with wood in less developed countries.

9) International Technical and Scientific Cooperation – Create the equivalent of an international energy and climate research fund that supplements the work being done on national levels towards specific technical solutions to emissions. Could develop in conjunction with IPCC WG III. One area of research should be emergency measures like geo-engineering.

If adopted as a package, the above measures address all 11 generic elements of carbon policy and have none of the 10 drawbacks of cap and trade. This approach transparently identifies governments as the responsible parties for reducing carbon emissions. This comprehensive climate and energy policy does not interfere with their ability to respond to changing climate circumstances and removes unaccountable financial markets from the core of climate policy.


1. Cap and Trade Derails the Ethical “Locomotive” of Substantive Climate Action – Part 1 « Green Thoughts - November 18, 2009

[…] have proposed elsewhere two (1, 2) more effective policy frameworks for cutting greenhouse gas emissions that are based for the […]

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