book.chapter Cap-trade market mechanisms

Currently, companies that emit pollutants contributing to global warming do not face any financial penalties, nor do those who devise effective pollution reduction methods receive any financial rewards. The cap-and-trade system is designed to introduce these economic incentives and disincentives. Here's how it would function in a straightforward manner: The United States Congress would need to establish a legal and progressively decreasing cap on the nation's allowable global warming pollution each year. These allowances would then be distributed among existing polluters in the form of "carbon credits," which are arbitrary units permitting the holder to emit a certain amount of pollution. Alternatively, these allowances could be auctioned by the government to generate revenue. The market itself would determine the ongoing price of these carbon credits. Should companies wish to emit more pollution than their current carbon credits allow, they would have to buy additional credits at the market price. On the other hand, companies that adopt new technologies to lower their emissions would end up with surplus carbon credits, which they could sell for profit on the open market. This system aims to leverage market forces and human traits such as ingenuity, idealism, and ambition to mitigate the damage leading to global warming. Companies that develop carbon-neutral methods of generating electricity, for example, could reap significant financial rewards under a cap-and-trade system. This approach would also level the playing field, making the risks associated with investing in new clean technologies more manageable due to the potential benefits. The true advantage of a cap-and-trade system lies in the regulatory certainty it offers. Currently, developers of low-carbon technologies must gamble on the emergence of markets for their innovations, making these investments risky from both technical and commercial perspectives. A cap-and-trade system would clarify commercial risks by ensuring a market for low-carbon innovations, thanks to a steadily decreasing cap. This would inherently increase the commercial value of any technology that contributes to this effort. Despite being the only developed country without a carbon cap, the United States, responsible for a significant portion of man-made greenhouse gases, has a duty to lead in addressing global warming. As the wealthiest nation and a global superpower, the U.S. has a unique capacity to lead by example. Expecting developing countries to act without the U.S. taking the lead is unreasonable. Some argue that the U.S. should wait for countries like China and India to act first, but the U.S. has never followed China's lead in foreign policy and should not start now. While some economists favor a carbon tax over a cap-and-trade system, arguing it would provide a clear price signal to encourage behavioral change and generate revenue for clean energy research and assistance for low-income households, a cap-and-trade system has its advantages. It could also generate government revenue through the auctioning of allowances. More importantly, a cap would mobilize significantly more resources than the government could, by creating a market where reductions in atmospheric carbon levels can be sold for profit. A tax does not create such a market and fails to harness the full spectrum of human potential in a fight that demands every ounce of creativity. The biggest drawback of a tax is that it requires lawmakers to estimate the tax level needed to sufficiently reduce emissions to ensure the planet's safety. Misjudging this level and allowing emissions to exceed safe limits is a risk too great to take. In the battle against global warming, our success or failure is collective; we either triumph together or fail together.