Published on June 18th, 2008 | by Stephanie Evans

Evaluating an Emissions Trading Scheme

Like any other system that is designed to improve conditions, optimize efficiency, or conserve resources, the cap and trade market for emissions—also known as an emissions trading scheme (ETS)—presents positives and negatives for consideration…

Smokestacks

Advantages of a Cap and Trade System

There are many advantages to dealing with emissions by using the cap and trade system:

Proven Efficacy
As shown with the Clean Air Act, the cap and trade system has worked. In fact, it worked faster and with a lower cost than predicted.
Flexibility
Proponents of ETS cite the system’s flexibility as a true asset. Other plans force all emitters to reduce their emissions, sometimes coercing decisions that are neither economically nor environmentally sound.
Quotas are Met
Unlike the carbon tax that taxes emissions, the cap and trade system sets an emissions limit, thus guaranteeing a set level.
Reduction Incentives
If an entity reduces its emissions beyond what is mandated, that entity is set to gain economically.
Free Market
Anyone can buy carbon credits. In fact, a number of socially responsible organizations buy carbon credits and refuse to sell them as a method of lowering caps without waiting for government agencies to do so.

Disadvantages to using an ETS

On the other hand, many experts argue that cap and trade is not the best way to help the environment…

Regulation
Whereas there was a system in place already measuring SO2 output before the Clean Air Act, there is little precedent for measuring green house gases. As opposed to carbon tax, there is a greater likelihood of corruption and thus a greater need for costly oversight.
Questionable Methods
Although in theory the CDM and other similar incentives mark a step forward in reducing emissions, it is difficult to assess with certainty. Under the CDM, an Annex I nation can gain carbon credits by aiding or creating projects that reduce emissions in non-Annex I nations.

However, take for example an Annex I nation that builds a coal power plant in a developing nation that is more efficient than the standard in that region. One can argue that this is reducing emissions given that the power plant was going to be erected anyway. On the other hand, it is impossible to confirm that the plant was going to be built, thus the project may have contributed to emissions.
Grandfathering
Many cap and trade projects have a history of grandfathering, whereby companies established before the implementation of the plan have less stringent or non-existent reduction rates. In fact, the first phase of the EU ETS (European Union Emissions Trading Scheme), which dated from 2005-2007, allocated so many carbon credits (or Emission Reduction Units as they are known in this system) that emissions actually increased by an estimated 1.1%.
Limited Application
Cap and trade projects work best for pollutants that have a general rather than a localized effect. If this is not the case, even if overall emissions decrease, a specific population will continue to suffer harmful effects.