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Meet Cap 'n Trade

Cap and Trade is the linchpin of the government's effort to curb carbon emissions. Senior Editor Paddy Hirsch explains how the cap and trade model works.

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Paddy Hirsch does a great job explaining concepts, but normally in his presentations he includes some mention of how a concept might go awry. As Paddy describes it, cap and trade involves substantial governmental "hands on" involvement--dictating who falls under cap and trade, dictating the types and amounts of pollution allowed to each, dictating periodic changes to the caps and periodically grading how each participant performed. Could such power in the hands of politicians and government officials go awry? Would this not invite attempts at backroom politicking and payoffs? Any system can be "gamed," but why not instead merely establish one-time clear and transparent tax rates for pollution, collected by the IRS, and minimize opportunities for underhanded manipulation?

This is a very engaging (and sorely needed) explanation of "cap and trade.” It describes fairly well the way legislation just passed by the U.S. House Energy and Commerce Committee would work - setting legally binding emissions caps that reduce over time, and distributing emissions allowances that can be bought and sold, the number of which gradually is reduced as the caps are lowered.

The only major factual error comes at the very end, with your assertion that without the caps, companies can emit whatever they want. CO2 and other greenhouse gases aren't yet capped, but other pollutants are, so there are limits (which soon will be further tightened) on the amount of pollution related to soot and smog, for example, that can be emitted.

Dan Riedinger
Edison Electric Institute
Washington, DC

Clever explaination which expains the economic incentive for the politically correct process redefining "polution" as CO2. People and countries that pour sewage into rivers and smoke into the air have no money, so let's blow off real polution to focus on something that "pays"....CO2

How are the individual polluters' waste calculated and tracked?

Cap and Trade, as this guy describes it, ultimately puts money in the hands of those that are already clean, which means that the pollution step down will go that much slower. I say this because the resources spent on acquiring the surplus cap credits from other companies can no longer be invested in acquiring cleaner methods of production for those who need it. Once you're clean, there's little more that you can do to reduce your pollution output.

Those that sell their cap credits may (read: will) profit by doing so, and thus will produce less of their product, which is generally bad news for everybody. Let us remember that wealth is not paper or electronic dollars: wealth is stuff; wealth is production.

This is very educational and leads to may pondering questions as raised by other comments. Will Cap.n.Trade be regulated and enforced in all countries by all companies without politcal interference? I think Not, and would suggest yet another way to encourage business, and production to leave the cap.n.trade nations. Secondly, once this type of logic is imposed on "pollutants" lets say, then where is the end to the reach of government to regulate all production and consumption, down to the individual? This is clearly a politically motivated assumption, but raises some serious questions as to why people think government has the answers to our social problems. They are clearly only looking, in my humble opinion, at the newly created tax base and the enourmous growth potential to exploit the real problems. Guess we shall learn from this financial mess how well the Government out performs private industry, and judging by actions, statements and policy, they are clearly power grabbing for authority and wrecking the integrity of the entire market system...did i mention "Free Market" system....yes, applied literally! Wake up America, cap.n.trade will NOT solve our problems, it will only proliferate them and drive more jobs out of America. But then again, Globalization has already whipped out most American production, so what will be left? WE ARE SHEEPLE BEING LEAD TO THE STEEPLE!

the pie analogy works, but perhaps you should talk about the impacts of this.
- Gus, what, he isn't going to Grow, eat more, produce more?
- you used the oil company as an expample, but what if there is not "new technology" or that "technology cost more" would not he price rise and be passed on to all the pies sold to customers?

Additionally,

the economy can still grow by adapting to higher prices with more efficient practices, technological innovations and use of alternatives (hopefully less pollutant ones).

@ Jerry Trancik

Actually in the video Paddy states the boys are fat, so the assumption is that they're over-consuming the resource (i.e- pie). So not only do they need to consume less anyway, but it's better for everyone if less is consumed.

"As the businesses increase in size your analogy does not allow for them to get more credits. It seems to work fine in a stagnate market but not a vibrant economy."

This analogy extends to each boy representing size and relative age of firms. It actually works quite well if you've studied cap and trade and can see the beauty in it.

The real point of cap and trade is not so much growth, but a reduction in negative behavior/effects that are not taken into consideration of the cost/benefit analysis of the market that currently exists. If those costs were taken into consideration (i.e- perfect or at least better information was available) the prices would reflect these costs and cap and trade wouldn't be necessary.

Why wouldn't it be necessary? Because with perfect information you'd be able to assess the sustainable threshold of resources and not pollute/extract beyond that point. Sadly this isn't possible in most cases and many things just aren't easily quantified, like the damage of pollution to the biodiversity and resilience of local forestry and wildlife.

Good to see that you are branching out beyond financial topics. These whiteboards are great.

On your cap and trade analogy.
Your analogy works fine if each of the boys stayed the same age. But as the younger boys age and grow and assuming they are fit and trim they will need more pies to keep their strength up and function properly. The same with the economy. As the businesses increase in size your analogy does not allow for them to get more credits. It seems to work fine in a stagnate market but not a vibrant economy.

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