Carbon cap and trade

Published: March 15 2009 19:12

After years of being cast as the villain of global warming, the US wants to make up for lost time. President Barack Obama’s ambitious environmental plans would leapfrog Europe in carbon dioxide regulation, covering about 80 per cent of US output versus less than half that in Europe. But such a shift also means a tough political haul. Huge compromises are likely, if the plan is ever passed.
Unlike a carbon tax, for which the price is known but the market response unclear, Mr Obama favours a cap and trade scheme. This would create a gradually descending limit on CO2 that would cut emissions 14 per cent by 2020 and 83 per cent by 2050. Meanwhile, there would be an auction among firms of tradeable “pollution permits”, which would raise some $650bn in the first eight years. Point Carbon, a consultancy, estimates such permits would have an initial cost per tonne of $14, implying that consumers would pay an extra 12 cents a gallon for gasoline and 7 per cent for electricity.

As with all Washington initiatives, lobbyists will seek to deflect costs or increase benefits for whichever industry they represent. Politicians from coal mining states, or those that depend most on fossil fuel power, will also howl that the measures punish the heartland in order to please environmentalists on the coasts. Zero-carbon producers, such as nuclear and hydroelectric plants, could reap a bonanza at the expense of less fortunate competitors. Subsidies will be sought for favoured technologies and industries.
The question of how other countries respond will also surely arise. If the result is that US industry shifts its heavy CO2 emitters to poorer emerging countries that lack such schemes, the net effect on climate change will be nil.
Idling all factories in the west may not be enough to stop greenhouse gases reaching disastrous levels if China and India do not also make cuts of their own. The final plan could look very different indeed from Mr Obama’s blueprint.
Copyright The Financial Times Limited 2009