Cap and trade is dead! Long live cap and trade!

Congress and the President seem ready to sign the death certificate for “King” cap and trade for this legislative session, and this columnist is glad they are. However, the American people must be careful not to bury “Prince” cap and trade along with his wicked father.

And precisely how does this noble Prince differ from the contemptible King? His sterling quality is none other than the principle behind capping and trading, which is essentially free-market capitalism applied to environmental regulation.

Sound Concept

Like any concept or principle that is theoretically sound, cap and trade can be (a) implemented for stupid reasons, (b) applied too harshly or (c) burdened with harmful appendages, any of which can do significant damage to the nation’s economy, not to mention household incomes. Much of the American public accurately perceived that the recent government proposals to cut greenhouse-gas emissions epitomized all three of these errors.

Leaded Gasoline

However, if and when the public decides (through its elected representatives) that limits should be placed on substance(s) perceived to be harmful to the environment (think leaded gasoline and asbestos), cap and trade is often the fastest, most efficient and least economically disruptive method of doing so.

There is clearly no free lunch, and every regulatory program exerts a price on the regulated community and its customers. But if the American people feel the benefit exceeds the cost, then cap and trade should be among those techniques seriously considered to accomplish their wishes.

Simply put, cap and trade is (according to the EPA) “… an environmental policy tool that delivers results with a mandatory cap on emissions while providing emission sources flexibility in how they comply.” Isn’t having the flexibility to choose from many solutions much better for business than a mandated “best-available control technology,” as selected by the regulators?

Beyond Compliance

Essentially, an effective cap and trade program sets an absolute target for emission reductions by each source, and those who go “beyond compliance” (through any means available) are given permission to sell their excess “allowances” to others who may not be ready to invest in new abatement technologies or more efficient manufacturing processes. If the supply of excess allowances is high, the price to buy them will be low and vice versa.

Two of the most vital elements in a non-harmful cap-and-trade program are fair targets and free initial allowances.

Fair Targets
First, the regulatory body must not set the emission reduction target too strictly because an insufficient number of allowances will be created and businesses will be forced to curtail production to cut emissions, rather than pay the excessively high market price for allowances. This result would cause economic chaos. Many of the recent Congressional proposals to regulate GHGs called for 50-80% reductions before 2050! Under the guise of environmental stewardship, these proponents were willing to oversee the massacre of the economy.

Free Allowances
Second, the regulatory body must not sell the yearly allowances to the sources. They must give them away at no charge, based on the source’s prior year emissions. If the government sells the yearly allowances, they impose a new tax on business where none existed before. The goal is not to raise government revenue, but rather to create incentives for businesses to reduce emissions. Selling the initial credits is a wolf-in-sheep’s-clothing method for government to generate more revenue – another economy-buster.

Make no mistake, we must be careful to properly define what cap and trade is and what it isn’t, and we must be diligent to hold our elected officials accountable if they apply it in draconian or hypocritical ways. But we also must not permit the demonization of a concept that is fundamentally benign.

Green Nuclear Energy

A useful comparison is nuclear energy. Since the early 1970s, “No Nukes” was the mantra of radical environmentalists, and much of the public bought into the rhetoric that nuclear power was at best flawed or at worst evil. Some four decades later, a transition finally occurred, and the younger generation has now declared nuclear power to be fundamentally green.

Unless we rescue the Prince from the fiery furnace of negative public opinion, we run the risk of depriving ourselves for decades of an excellent tool to help implement desirable environmental policies.