Putting a Cap on Carbon: Solutions to Carbon Emissions in the Marketplace

By: , Weston, CT // August 22, 2019

Since the advent of the industrial revolution humanity has been emitting carbon dioxide into the Earth’s atmosphere at an unprecedented rate. Once released, carbon dioxide acts as one-way insulation – as solar radiation warms the surface of the Earth, greenhouse gases such as carbon dioxide and methane, absorb this thermal energy trapping the heat, resulting in an overall warming of the planet. The leading source of this gas is the combustion of fossil fuels in a variety of residential and industrial contexts.

There is a scientific consensus that carbon dioxide and similar greenhouse gases, emitted from human activities, have stimulated a rise in global temperatures. If left unchecked, this will yield abnormal weather patterns and result in significant climatic shifts. Regions that were once arable farmland may become arid and uninhabitable. Coastal regions will likely experience increased flooding and coastal properties may be consumed by sea level rise. We are already beginning to witness these consequences in the South Pacific where entire island nations may be forced to relocate if the ocean continues to rise.

The severity of this situation necessitates an immediate reduction of carbon emissions. Many companies have developed, or are developing, successful technologies and systems to curb carbon emissions. Among these are a growing number of startups, including Global Thermostat, Climeworks and Carbon Engineering, and other ventures that are attempting to make atmospheric carbon sequestration a profitable industry. According to many scientists, carbon-reduction technology is viable; the question is how to encourage established industrial corporations dependent on fossil fuels to change course and implement these new technologies worldwide.

Here exists the challenge: The economic model that evolved out of the industrial revolution does not account for the inherit value of the natural world to society, resulting in corporate economic priorities that are not aligned with – and more often than not, at odds with – environmental protections. One way of thinking about this dilemma is to consider William Forster Lloyd’s oft quoted economic theory colloquially known as the “Tragedy of the Commons”.  Put simply, the theory refers to the tendency of individuals to exploit shared resources for personal gain, resulting in the depletion or impairment of the resource for all. In other words, short-term personal benefit is often prioritized over the long-term communal good when the resource in question is shared or unregulated. This theory successfully illustrates the present dynamic in which competing capitalist enterprises driven by short-term gains appear in direct conflict with the long-term collective need to preserve and protect natural resources. If the world is going to come together to solve the climate crisis, then a reconciliation of these opposing interests is a priority.

Various government-imposed incentives have been deployed to achieve this reconciliation, with varying degrees of success, in different parts of the world. The two most popular systems are a Carbon Tax, and a Cap and Trade system.

Carbon Tax

A carbon tax allows the government to set a ceiling on carbon emissions per corporate enterprise; and gives the state the power to tax emissions in excess of  this limit at a specified rate. The goal is to incentivize a voluntary reduction in carbon emissions by the corporation, which is believed by many to be the most effective means of reducing carbon emissions within a capitalist economy.

Cap and Trade

A Cap and Trade system works by setting a “cap” on the total amount of permissible emissions industry-wide; and granting or selling a transferable right to emit carbon up to the established ceiling.  These so-called permits to pollute can then be traded or sold, creating in effect, a market for polluting rights.  Industry is thereby incentivized to self-regulate carbon emissions given the monetary value of the permit. Regulators can lower the cap over time by buying back permits in order to induce companies to make continuous reductions in carbon emissions.

Cap and Trade schemes have useful applications beyond the regulation of carbon dioxide. Cap and Trade programs have been successful at encouraging a reduction in both waste and pollution.

These economic solutions, however, have potential flaws. “Carbon Leakage” can occur if companies elect to outsource their carbon emissions by moving factories to foreign countries with less strict regulations; and there is the possibility that larger companies will hoard permits in order to injure their competition. The most effective resolution would be an international agreement governing a global carbon market. But with flagging support of international environmental agreements in the United States following the withdrawal from the Paris Climate Accords, other avenues must be explored.

Border Carbon Adjustments (BCAs) are one solution. They are essentially carbon specific specific tariffs meant to even the playing field between countries with conflicting carbon policies. Unfortunately, this approach runs afoul of many international agreements and could have an unpredictable impact on the global economy.

In the United States, a federal carbon pricing policy is a long way off given the stance of the current administration on climate science. Individual state governments have the power to enact regulations within the bounds of state law; but since they lack the ability to regulate interstate commerce, companies could simply move operations to states with less regulation. This concern is what convinced Republican lawmakers in Oregon to abandon the State Senate in an effort to block the adoption of a proposed Cap and Trade bill. They feared that such regulation would be damaging to local business, but how valid are these concerns?

The proposed bill in Oregon was modeled on a similar law in California. The Californian Cap and Trade bill, which was enacted in 2013, has been a resounding success; and has recently been extended from 2020 to 2030. California has the largest GDP of any state in the country and (perhaps not coincidentally) is at the forefront of the renewable and clean energy markets. The introduction of a Cap and Trade system has had minimal, if any, negative impact on the state’s increasingly green economy. Positive results have also emerged from Cap and Trade systems in the European Union and other parts of the world. Even voluntary Cap and Trade markets have emerged, which indicates that a reconciliation between corporate and public interests is possible.

Ultimately it may take a combination of measures incentivizing cooperation to yield the results necessary to combat climate change. Carbon Taxes and Cap and Trade systems place the responsibility to reduce emissions squarely on the source. But everyone has a part to play in the fight to protect the environment and avoid a planetary tragedy. To make the necessary change, it will require not only the motivation and dedication of governments and corporations, but the commitment of individuals from every nation in every corner of the world.



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