Cap and trade explained

The cool basics of the hottest topic in climate change
By LISSA HARRIS  |  May 6, 2009

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The general idea behind cap and trade is pretty simple: put a tax on pollution, and the market will crank out less of it. But if a pollution tax is a lever, cap and trade is a vast, rickety Rube Goldberg contraption, complete with ramps and gears and pulleys and suspended buckets of water. Ingenious? Yes. Complicated? Fiendishly.

Under a cap-and-trade program, the government decides how much total pollution it will allow all companies to produce each year (that's the cap), and gives out permits to match. Once the permits have been distributed, companies can then buy and sell them among themselves (that's the trade), so that cleaner plants can make money by selling their extra permits to dirty ones.

President Obama has made it clear that cap and trade is a high priority on his agenda, and the pressure is on Congress to pass a bill he can sign. But on Capitol Hill, cap and trade remains an item of fierce controversy, with lawmakers battling over the details of legislation introduced recently by House Democrats.

What's the magic number?
Cap-and-trade enthusiasts like to talk in pairs regarding the cap. Twenty percent by 2020. Eighty percent by 2050. The grim fact is, nobody knows for sure how much carbon reduction we'll need in order to halt the worst effects of climate change, or if it's already too late to avoid irreversible warming.

Who has to pay?
You won't need a permit to fill up the Cadillac. Under any sane cap-and-trade program, only large polluters will pay for permits. Utility and electric companies, large manufacturers, and oil and gas importers would all probably be covered — but there is still plenty of room for squabbling over the details of how to deal with each sector of the economy. A big question mark is how to treat agriculture, which contributes vast amounts of greenhouse gas but whose emissions are hard to measure and regulate.

No matter who buys the permits, most of the costs will probably be passed on to consumers, as everything from electricity to yo-yos to yachts begins to factor in the price of carbon.

Will there be offsets — and if so, how many, and what kind?
In addition to buying emissions permits from the government, companies might be able to get extra permits by investing in a wide variety of carbon-offset projects, from planting trees to burning the potent greenhouse gases released by landfills and factory farms.

Environmentalists have mixed feelings about this. Carbon offsets have been scoffed at in the press and compared to papal indulgences. Although some offsets are clearly better than others, it's tough to measure how much carbon they really reduce. And since each kind of offset comes with its own complicated accounting system, cap and trade would be much simpler without them.

But on the other hand, offsets give skeptical farmers and financiers a reason to get on board the green bandwagon. After all, there's money to be made by selling them.

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