August 13, 2008
Economic Snapshot - August 13, 2008
Cap and trade: Effective policy or just every bureaucrat’s dream?
On June 2, 2008, the provinces of Ontario and Québec announced that they were planning to introduce a “cap-and-trade” system in order to try and stop climate change.
The cap-and-trade system is already in use in Europe. Under the program, the government arbitrarily sets an overall limit (cap) on total emissions. Based on this cap, the government then arbitrarily puts quotas on the amount of CO2 firms or utilities can emit.
Finally, government arbitrarily allocates “allowances” to each firm that represents the volume of their quota. Firms are required to meet the CO2 quota in one of two ways: (1) by reducing their emissions; or (2) by purchasing (trading) “allowances” from firms that have more than they need.
If this whole process sounds like a bureaucrat’s dream, it is. A recent article by Steven Mufson in the Washington Pos Although the cap-and-trade approach is touted as market driven, the foundation that it rests on is totally arbitrary. This is because no one knows how much impact, if any, a one-ton reduction in carbon dioxide has on the weather.
Moreover, according to the International Energy Agenc While the benefits of cap-and-trade are impossible to quantify, the costs are not. In Europe, energy-intensive industries are being forced to cut back on production, due to the high cost of electricity.
Cement plants, which are also energy intensive, are planning to import raw materials from countries not subject to the cap-and-trade system. In Germany, the cost of electricity for consumers has risen by 25% since the system was introduced and will probably go higher because of it.
Just as we have found with the increased production of biofuels, the cap-and-trade CO2 system appears to have major hidden costs and very questionable benefits.
John Clinkard has over 30 years experience as an Economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Forecast of World Carbon Dioxide Emissions, 2005-2030 *There are 16 developed countries in the Organization for Economic Co-operation and Development (OECD).
Data source: Energy Information Administration, World Energy Projections Plus (2008)/Chart: Reed Construction Data - CanaData.
