Cap and Trade Part 3 – You Ask, “What?” I Say, “How Wide?”

by Bill Chameides | June 10th, 2009
posted by Erica Rowell (Editor)

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This is part 3 in a series on cap and trade.

Which greenhouse gas emissions do you find when you look under a cap and trader?

Some time ago, I posted on “where” a cap or carbon tax should be applied. A related issue is “what” type of emissions should a cap (or carbon tax) be applied to. And really considering the “what” means considering “how wide?”

Wide or Narrow

In This Series
Part 1: It’s About the Cap, Stupid
Part 2: Walking the International Tightrope
Part 3: You Ask, “What?” I Say, “How Wide?”
Part 4: Forests, Farms, and Offsets
Part 5: What’s With the Add-Ons?
Part 6: Emission Allowances

Where cap and trade is concerned, you can’t get any wider than an “economy-wide” cap. In this case, every and all sectors of the economy that lead to greenhouse gas emissions are said to fall under the cap; their emissions are tallied up in the calculation of the total emissions allowances that must in the aggregate decline over time as the cap declines.

The advantage to an economy-wide cap, my economist colleagues have explained to me, is that it tends to minimize costs and maximize efficiencies by allowing emissions trading across all sectors of the economy.

For example, consider two sectors of our economy that emit greenhouse gases: power plants and the oil industry (whose emissions occur mostly out of the tailpipes of our cars and trucks). And suppose, as will likely be the case, that emission reductions from power plants will be less costly than those from the transportation sector (see here [pdf] for example).

If the cap is wide and applied to both, costs can be minimized by allowing power plants to make most of the emission reductions and selling emission allowances to the oil/automobile sector.

If the cap is only applied to the oil industry, then this sector would have to make the emission reductions on its own and at greater cost. Of course one could apply the cap to power plants alone, but then this begs the question of what one does with emissions from oil.

Waxman-Markey aims to be very wide, including power plants, large factories, and oil (both domestic and imported) in the cap. Some of my colleagues have opined that this is going to be too complex — capping all those sectors together will require too much monitoring of different kinds of emissions and too much market oversight. And with all that complexity, they argue, those cost savings may prove to be illusory.

Another criticism is that, given the difficulties in achieving real reductions from automobile emissions, most of the reductions will end up coming from power plants and that there will be little innovation from the mobile sector of our economy. (The Obama administration and Representatives Henry Waxman (D-CA) and Ed Markey (D-MA) have tried to address this latter concern using what I call “cap-and-trade add-ons,” like CAFE standards. More on that in a future post in this series.)

One suggested alternative to the Waxman-Markey approach that I have heard would limit the cap to so-called “point sources”; these would include power plants and factories. The advantages are that emissions from point sources are easy to monitor and verify, and, in the case of power plants, we have experience capping under the Acid Rain title of the Clean Air Act Amendments of 1990.

Emissions from the oil industry/automobile sector would be reduced, in this approach, outside the cap using some combination of a gas tax, gas mileage standards for cars, and mandates for mass transportation. I find this to be an interesting idea, but I’m not sure I would favor dismantling Waxman-Markey at this point. Doing so would likely put off any legislation to the next Congressional session.


Waxman-Markey throws its cap-net pretty wide, but is it, as some have called it, economy-wide? Hardly. A true economy-wide cap is just not realistic — there are way too many sources of greenhouse gases in the United States, many of them so small that they are not worth worrying about. For example, in Waxman-Markey, certain factories and fossil fuel producers that emit less than 25,000 metric tons of carbon dioxide equivalent beginning in 2008 are not subject to the cap. (Get details on the Waxman-Markey bill from the Committee on Energy and Commerce, or read this bill summary from the Alliance to Save Energy.)

Other important sectors left out of the cap are farms and forests. Let’s look at how come.

Carbon From Farms and Forests

Farms and forests are huge repositories of carbon with large quantities of greenhouse gases flowing back and forth between the atmosphere and the land each year. Changes in agricultural and land management practices, for example altering the way hog manure is processed or changing the timing of timber harvesting, can result in significant increases or reductions in greenhouse gas emissions.

And yet, Waxman-Markey, like virtually all other climate bills that have been seriously considered, has kept farms and forest out of the cap. There are probably two main reasons:

  • Complexity: Including farms and forests in the cap would be exceedingly difficult. It would be an understatement to say that the number of sources from farms and forests is “very large.” Think about having to somehow document practices and emissions at each of these sources and then incorporate them into a market system of trading.
  • Politics: It is unlikely that farmers and foresters would take kindly to the idea that the way they operate their enterprises would be affected by a declining cap, and they tend to be a pretty strong voting bloc in some key states.

Which is not to say that farms and forests are ignored in Waxman-Markey. Tune in next week, when I pick up the thread with the fourth part of the series: Farms, Forests, and Offsets.

filed under: agriculture, automobile, carbon dioxide emissions, climate change, economy, faculty, global warming, oil, transportation
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