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October 2008

Carbon Cap-and-Trade: A Consumer Issue?

I served the past 17 months as a member of Governor Jim Doyle’s Global Warming Task Force, assigned to develop a state action plan to combat global climate change. The Task Force produced a number of recommendations. One thing it wisely did not recommend was a complex state or regional carbon cap-and-trade program, opting instead for consideration of national cap-and-trade that includes all industries and not just those producing electricity.

The idea of a carbon cap-and-trade program is relatively simple. There are two parts: the cap, which is a limit placed on the allowable carbon pollution divided up between sources of the pollution, and the trade, which says that if an industry is under the cap, it may sell its shortfall on the market. If the industry exceeds the cap, it must buy permits on the market. The cap is then expected to get tighter in succeeding years, and this system is thought to provide a financial incentive for industries to modernize facilities to lower carbon production rather than buying costly permits.

Why should this matter to you? While the U.S. Senate earlier this summer rejected legislation sponsored by Connecticut Senator Joe Lieberman and Virginia Senator John Warner that would have created a carbon cap-and-trade program, both John McCain and Barack Obama have argued for global climate change legislation. Therefore, carbon cap-and-trade legislation is likely in the 2009 Congress.

Advocates argue that cap-and-trade programs would help combat the production of greenhouse gases such as carbon dioxide. However, recent reviews suggest the program can be subject to abuse and cost consumers considerable sums. For example, the United Nations runs a program called the Clean Development Mechanism that provides financial incentives to countries to cut greenhouse gas emissions. The British Broadcasting Corporation (BBC) this past June investigated the United Nation’s program in a report entitled, “The Great Carbon Bazaar.”

BBC investigators found there was “evidence of serious flaws in the multi-billion dollar global market for carbon credits” being offered to developing countries to cut greenhouse gas emissions through the offering of carbon credits. The carbon credits, according to the BBC, were supposed to be paid to cut additional amounts of carbon beyond what would have occurred without the financial incentives. However, the BBC found that carbon credits were being paid to projects that cost much less than the amount of the credits paid or did not achieve a real pollution reduction impact. The BBC cited a single project in India that will receive $500 million over 10 years for a pollution reduction project its developers said would have occurred even without the carbon payments. As a result, the BBC concluded that its investigation “reinforces doubts that the program is leading to real emission cuts, which is not good news for the effort to combat climate change.”

This month’s column isn’t one of my typical consumer warnings. But carbon cap-and-trade programs could lead to a different—and potentially very expensive—kind of consumer exploitation since a national cap-and-trade program will likely lead to higher costs for energy and consumer goods that will be paid by consumers like you and me.

As a result, we may both want to carefully watch Congress to ensure it walks carefully when considering global climate change legislation.


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