MIT analysis shows how cap-and-trade plans can cut greenhouse emissions

November 13, 2008

Researchers at MIT's Center for Energy and Environmental Policy Research have produced a report concerning key design issues of proposed "cap-and-trade" programs that are under consideration in the United States as a way of curbing greenhouse gas emissions. The first contribution of the three-part study found that, based on an examination of the European Union's system and of similar U.S. programs for other emissions, such a program can indeed be effective in reducing emissions without having a significant economic impact.

"The European experience confirms much of what has been learned from similar U.S. systems for other emissions, namely, that cap-and-trade systems can be constructed, that markets emerge to facilitate trading, that emissions are reduced efficiently, and that the effects on affected industries are less than predicted," said A. Denny Ellerman, the study's lead author and a senior lecturer in the MIT Sloan School of Management.

The study found that the most controversial aspect of the European program was how to allocate the permitted emissions levels to different producers. Initial free allocation of allowances, they found, was the necessary price for gaining political acceptance, as it has been in U.S. systems. Over time, the clearly established trend in the E.U. is to phase out the free allocation of permits in favor of auctioning them.

The second part of the report looked at mechanisms that can be used to control the costs that will be imposed on power producers as a result of implementing a cap-and-trade system. Several alternatives were analyzed, including such things as a "safety valve," banking and borrowing of allowances, and renewable portfolio standards. Rather than a single best choice, the study found that different mechanisms work best for addressing uncertainties associated with long-term, short-term and start-up costs.

The report's third section examined the relationship between state and federal regulations on greenhouse gas emissions. With no federal policy now in place, many states are moving forward with their own initiatives, which range from commitments to reduce greenhouse gases to a regional, multi-state cap-and-trade program slated to begin in 2009.

While federal legislation is expected in the next few years, it is unclear how it will define the relationship between a federal cap-and-trade program and other state or regional initiatives. The report analyzes the economic and environmental impacts of the range of possible interactions between the federal program and state or regional programs.

Differences in the abatement costs among states can create economic inefficiencies that make achievement of the climate goal more costly than it need be. This inefficiency can be avoided by either federal preemption of duplicative state programs, the authors found, or by a "carve out" of more demanding state programs from the federal cap with linkage.

Source: Massachusetts Institute of Technology

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5 / 5 (4) Nov 13, 2008
Excuse me? How has cap-n-trade helped Europe? Except for Germany and Britain the levels of emissions in Europe have been rising. And the only reason Britain's has gone down is because they exported their heavy industry overseas.
5 / 5 (4) Nov 14, 2008
This is not even propaganda,its pure bullshit.
The Evil Union's cap and rob system is in meltdown.Some countries do not want it and some want changes to suit their "special" interests and circumstances.UK power prices have gone through the roof partly because of cap and trade and "renewable energy initiative" which supliers pay to the government then add to our bills.
5 / 5 (4) Nov 14, 2008
Cap and trade is an unregulated way for companies to create monopolies.

Image the 3 of us were all in business making light bulbs. We get stuck with cap and trade and each receive an allowance of emissions that allows us to produce 100 tons of product after incentive and credits.

mikiwud has a small economic shortfall and sells half his emissions allowance credits to GrayMouser.

GM now has the ability to produce 150 tons of product while I'm limited to 100 tons and miki to 50 tons.

miki goes out of business due to being unable to make enough product to satisfy his distributors and they go over to GM. Since GM is able to make the product, he begins to dominate the market and has the spare cash to buy out the rest of miki's business as well as his remaining 50 tons of product production emission allowance. GM now has majority market share 2:1.

As this process continues businesses will suffer more and more. Becomming the last remaining business due to market selection or corrolary requirements doesn't fall under anti-trust.

So who's actually pushing for cap and trade right now? USCAP.

USCAP is composed of:

General Electric, AIG, GM, Johnson and Johnson, British Petroleum, John Deere, Dow Corning, Du Pont, Duke Energy, Pepsi, Shell, Siemens, Caterpillar.

All heavy industry, "Best of Breed" companies that have either had flags raised about anti-trust practices in the past, or exempted from cap and trade due to their extensive defense contracts.

I know cap and trade worked for sulfur emissions in the past, but the Sulfur emission cap system was limited to a very small subset of businesses, most of which were exempted, and ended up driving a lot of the auto manufacturing from America to Canada and Mexico.

Cap and trade is not a good idea, although as so far, it's the only feasible one.
4.2 / 5 (5) Nov 14, 2008
The previous posters have quite cogently and succinctly expressed the thoughts on my mind regarding this article. I'll just add this: Here! Here!
4.2 / 5 (5) Nov 14, 2008
Wikipedia says that should be Hear! Hear!
5 / 5 (3) Nov 16, 2008
I think that cap and trade is a truly wonderful idea. :)
Don't you see? When companies are charged by the government for the right to pollute, we all get to pay much, much, very much more for everything we need to live! :) That way the government can tax you and me into a very nice oblivion and they can say it is the corporations fault! :) Silly corporations are going along with the idea because it is either that or they will be shut down by our sweet, sweet legislators and the EPA!!! Oh my my my this is going to be so much fun!! I think I will become a street sweeper in the new economy!!! It is so exciting to think of all the opportunities we will have to sponge off of Uncle Sammy Daddy!!! We love you Uncle Sammy!!
5 / 5 (3) Nov 17, 2008
What I want to know is why there isn't a link to the report?

Also, is this the report with no economists on it's list of authors (just a bunch of management students)?

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