"Cap-and-Trade" Programs--Part 1

Over the next bit, my plan is to provide a series of posts describing so-called "cap-and-trade" systems and carbon offsets.  First, I will describe the system in general.  Next, I will describe how agriculture may fit into this system.  Finally, I will provide some perspective on the workability of such a system.

In its most basic form, cap-and-trade (or CAT) systems set limits on greenhouse gas (GHG) emissions for large emitters (see the Wikipedia description of this for more details; but note that the Wikipedia version is significantly more complex and probably edited by proponents of the system so that they paint it in a very positive light).  To the extent a firm can operate below its cap on GHG emissions, it can sell its permits to less pollution efficient firms.

Some critics argue that this simply allows firms to circumvent reductions by purchasing permits to pollute from other firms or the government.  But this critique ignores two important elements of the policy.  First, total emissions are capped so that if one firm pollutes more another firm must pollute less to offset.  Second, the cap is reduced over time until the total emissions reduction goal is reached.

Some evidence suggests that a similar program implemented in 1990 to control SO2 (sulfur dioxide, the primary cause of "acid rain") successfully lowered emissions faster and at a lower cost than anticipated.  Thus, while this type of program is not new, we are moving into a new world of trading carbon.  For example, the Chicago Climate Exchange currently trades a contract on CO2 (carbon dioxide) emissions.  

A key advantage of this approach is that it allows for a market-based mechanism to control emissions rather than government regulation.  Regulation simply sets quantitative limits without recognizing that different firms are more or less efficient at controlling pollution.  For those less efficient firms, the cost of control is higher.  Therefore, forcing these firms to control at the same rate as more efficient firms raises costs to those firms, and, subsequently, consumers and society.  A CAT system allows more efficient firms to profit by controlling larger shares of total industry emissions, thereby lowering the overall cost to society.

One critique of CAT systems centers on the well-worn dialogue that markets "don't work" and therefore require command-and-control central planning approaches.  A more realistic critique is that because the science on carbon sequestration, destruction, emissions, and global warming are inexact at best.  Thus, this market is based on behavior that is difficult or expensive to verify.  I will discuss a few of these ideas in more detail later.

At present, there is no forecast of agriculture being included an any "cap" scheme.  That is, no discussions have mentioned placing caps on agriculture's CO2 or other GHG emissions.  But, the industry should stay aware of the debate.  For now, agriculture is being mainly discussed as a "partner in the solution."  That is, agriculture is being viewed as a potential source of carbon offsets that can be sold to industrial firms.