The big news of the day is, of course, the U.S. presidential election. This week ClimatePULSE will take a look at a topic where the parties found some common ground during the campaign – a cap-and-trade system. While each party has made its own adjustments, both Obama and McCain seem poised to implement a cap-and-trade system once the new administration is settled. The Democrats favour a 100% auction, in which all emitters will purchase credits, while the Republicans plan to issue credits for free market trade with the possibility of moving towards 100% auction in the future. Both plan to stimulate the growth of clean technologies, but the actual operation may vary significantly between the two approaches.
In its most basic form, a cap-and-trade system allows companies who have more emission credits than needed to trade to a company who needs additional credits to compensate for their emissions. While the chief goal is to reduce emissions, a cap-and-trade system does so by encouraging innovation (a portion of generated funds will go towards the development of new technologies). Although resources and capital are required to develop and acquire new technologies, companies can achieve great returns by reducing their cost of operation while earning income through trading emission credits. Such systems have been proven successful overseas as part of the European Union Greenhouse Gas Emission Trading Scheme (EU ETS) and in the US with initial auction of allowances under the Regional Greenhouse Gas Initiative (RGGI), not to mention the similar programs for NOx and SOx emissions that have been in practice for years. While this type of system will result in some companies incurring additional costs, others will find additional revenue and the clean technology sector as a whole will gain some much-needed support and demand.
While both parties follow basic principles of cap-and-trade systems, they each have their own spin on the topic. The key difference is the initial allocation of permits and how auctioning will work. The Democrats plan calls for a 100% auction, meaning that all permits will be given to the highest bidders and they will be allowed to produce GHGs equal to the amount of permits they own. This style of cap-and-trade is similar to a carbon tax in that all emitters are required to purchase credits. The Republican campaign, on the other hand, follows a style similar to the EU ETS in that permits will be distributed without a fee and can later be traded. Under such a system, the free market will determine the value of carbon allowances and offset credits. Each party touts the benefits of their own position towards permit auctioning and the government’s role in cap-and-trade. This simple difference between the two platforms can create a substantial difference in how the system works and its effectiveness, and we encourage our readers to explore the details of the approach.
The other notable difference between the two plans is the levels by which they plan to reduce U.S. GHG emissions. The Democratic plan is slightly more aggressive, calling for a reduction of 80% of 1990 GHG levels by 2050 while the Republican campaign aims for a 60% reduction under the same time frame. It is impossible to predict what may happen between now and 2050 and how the planned emission reductions will fair in that time. More important is that GHG reductions under a mandatory national program begin as soon as possible, and this will be affected by which style of cap-and-trade system the new administration follows.
The support for a cap-and-trade system in the U.S., supported by both parties in today’s election, is certainly a step forward in reducing climate change. While both the Democrats and Republicans promote cap-and-trade, there are key differences between how the system should work. Information on the climate change and cap-and-trade policies of each party can be found here and here, and a non-partisan comparison of each party’s stance on climate change has been published by the Pew Center on Global Climate Change.
ClimateCHECK is a greenhouse gas (GHG) management services and solutions company. The firm’s solutions support all facets of the carbon commodities market, including the verification, validation and consultation of GHG inventories and program portfolios, as well as quantification protocols for emissions reduction projects and clean technologies. ClimateCHECK is a sponsor and co-founded, with World Resources Institute and Carbon Disclosure Project, the Greenhouse Gas Management Institute (www.ghginstitute.org). Founded in March 2007, the company has locations throughout North America. For more information visit www.climate-check.com