Cap and Trade by Numbers
Air Date: Week of March 13, 2009
Robert Stavins, director of the Harvard Environmental Economics Program at the JFK School of Government.
President Obama has called for a cap and trade system to limit the greenhouse gas emissions that cause climate change. Host Bruce Gellerman asks Professor Robert Stavins, director of the environmental economics program at Harvard’s Kennedy School of Government, for a primer on how the environment and people can profit from pollution.
GELLERMAN: From the Jennifer and Ted Stanley Studios in Somerville, Massachusetts - this is Living on Earth. I’m Bruce Gellerman, in for Steve Curwood.
In the coming weeks and months you’ll be hearing a lot about “cap and trade”. The President is counting on it to help bail out the budget and save the planet. Cap and trade is a scheme for buying and selling the right to emit carbon dioxide. It allows the marketplace to put a price on that pollution, aiming to reduce the greenhouse gas over time. Cap and trade has been used successfully before. It sharply limited acid rain and smog.
Professor Robert Stavins is director of the Harvard Environmental Economics Program at the JFK school of Government. And he says cap and trade has a lot going for it.
STAVINS: Well, the good news is that people can potentially make money off of reducing pollution. That’s how you can harness market forces to protect the environment. So that’s actually the good news of these approaches is that it provides opportunity for people to make money, as long as it’s done in legitimate ways.
GELLERMAN: Well, let’s go through cap and trade. Let’s start with the cap.
STAVINS: So the cap is set to limit pollution overall, much as it is with any kind of environmental regulation.
GELLERMAN: So you say to a producer of carbon dioxide, you can only produce this amount and no more.
STAVINS: Well the cap doesn’t refer importantly to individual producers. It refers to the economy as a whole. So the cap might provide that emissions are going to be reduced this year by two percent, and the next year by two percent, over time by, in fact, 80 percent. That’s the cap and it’s across the entire sector or even the entire economy.
GELLERMAN: And the trade?
STAVINS: And the trade is that individual firms under the cap have each been allocated allowances – big political question of how they’re allocated – and then they are free to trade, but they can only emit as much pollution as the allowance says. And if you add up all those allowances, all the tons in the allowances, that’s equal to the cap. And the cap is declining over time.
GELLERMAN: So it’s seems that another name for cap and trade might be carrot and stick or maybe stick and carrot.
STAVINS: I think that that’s absolutely right. The carrot is that it is going to cost something to some firms and can benefit others to engage in a trade, so there are gains from trade. And the stick that no one should forget is that monitoring and enforcement is required; both of the emissions themselves or the carbon use, and for that matter also of the allowance trading system.
GELLERMAN: So private industry is not too happy about this because they gotta buy these things.
STAVINS: Well there’s tremendous support within private industry for the cap and trade approach in general because they see regulation coming and it’s the lowest cost approach for them. There is not widespread support for the auctioning of the allowances, because when the allowances are auctioned it means private industry pays not only to their control costs, but they also pay for the right to emit.
GELLERMAN: Well the Obama administration is literally banking on this money. How much money are we talking about?
STAVINS: Well the Obama administration in its recent budget projected that they would obtain revenues on the order of 750 to 800 billion dollars over a period of close to a decade from the auction of the allowances, from selling the allowances to private industry.
GELLERMAN: Would I be able to buy one of these allowances?
STAVINS: Well, that’s interesting because under the way at least the previous statutes had been written for the SO2 allowance trading program, whether or not you are regulated by the program – in that case an electricity generator – you can buy an allowance. And, in fact, under the SO2 allowance trading program you can go to the EPA website and see this – a substantial number of the purchases of allowances have been by student groups. And they take that allowance, and you know what they do with it? They tear it up. And something remarkable happens when an individual citizen buys an allowance in cap and trade program and tears it up or hides it. They have actually made more stringent the overall cap that was enacted by the Senate, the House of Representatives and signed by the President.
GELLERMAN: Because they’ve reduced the number of shares.
STAVINS: That’s right. That’s right. And it’s remarkable. I mean, frankly, I don’t know of any other public policy in any sphere where an individual citizen through their actions can actually render more stringent a policy enacted by the Congress.
GELLERMAN: So, can it reduce the greenhouse gas? It may work in the marketplace, buying and selling, but will it actually reduce greenhouse gases?
STAVINS: If the cap is set to bring down the level of CO2 and or other greenhouse gases over time, then as long as monitoring and enforcement is working, then it will definitely work. And our experience with these programs is that they work. Compliance with the acid rain the SO2 allowance trading program is about 99.9 percent.
GELLERMAN: But what about capping and trading things like leaving the fossil fuel in the ground?
STAVINS: Well essentially that’s what’s happening. That’s an interesting point. I mean, essentially what happens with a cap and trade system is that it increases the cost of bringing coal, for example, into the economy. In fact, many people have said that a meaningful carbon policy is essentially a tax on coal, because that’s what they really become because of the great carbon intensity of coal compared to the other fossil fuels. And indeed a meaningful cap and trade program such as the one the administration has described will indeed discourage production of coal with one very important exception – and that’s the possibility of technologies being developed for carbon capture and storage, that is using coal to generate electricity, capturing the stack gases, separating out the carbon dioxide, liquefying it, and putting it underground in storage. There are a lot of chains in that very long sentence and there’s a lot of technological uncertainty.
GELLERMAN: Yeah, holy grail.
STAVINS: Well it’s certainly the holy grail for the coal industry and for many electricity generators who are highly reliant upon coal.
GELLEMAN: Professor Robert Stavins is director of the Harvard Environmental Economics Program and the JFK School of Government. Professor, thank you for coming in.
STAVINS: My pleasure.
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