Cap and trade programs aren’t a new idea, but they keep coming into public view every few years. Let’s take a look at what they are, how they work, and their results.
Here are Five Fast Facts on cap-and-trade programs:
- 😮💨 The Basics - A cap-and-trade program is a regulation that limits the emissions of certain substances as a result of industrial activity. The most common – and most politically relevant – is carbon dioxide, but it can be applied to others, too. Companies buy permits to generate the capped substance, and the limit is applied to the entire industry. In short: with CO2, it’s designed to make energy more expensive (even supporters admit this).
- 📉 The Progression - As time goes on, the government lowers the cap, which makes the permits more expensive and encourages companies to produce less of the capped substance through upgraded technology and better efficiency. If a company goes over its cap, it pays taxes on the excess. IMPROVE OR ELSE.
- 💡 The Loopholes - It’s a government program, so of course it has some loopholes built in! Companies that reduce their emissions can sell their allowances to other companies (this is the trade part) or “bank” them for future years. That seems a little mercenary when you’re trying to save the planet don’t you think?
- 😣 Does It Work? - Unfortunately, there’s not a great track record of this kind of program affecting climate change. For example, Europe started theirs in 2005, and since then emissions have gone up 1.9%. The problem? They know that to follow the rules will cause economic hardship and job losses (which hit lower income people the hardest), so they pretty much ignore it. Plus, it’s not like there are walls up to space that separate the air from one country to the next – even if one nation reduces their emissions, it’s all one big bubble around the planet, right?
- ⚡ The Tesla Example - That’s not to say there isn’t money to be made here. Tesla, for example, has really leaned into this sort of thing, selling its allowances to other companies for years. Last year alone, they got paid almost $2 billion for their carbon credits! So hats off to Tesla for gaming the system brilliantly!
🔥Bottom line: There are other factors, too. Cheap and plentiful energy is strongly connected to economic prosperity, so making energy more expensive will reduce the overall wealth of the nation. Increasing the cost of local energy will force more imports, meaning more wealth for nations that are hostile to us and who produce way more emissions than we do (because they don’t care). And when you’re talking about limiting carbon dioxide use, well, literally every living creature that breathes oxygen produces it. How are you going to cap (or even monitor) that?
It's a great example of a noble idea that causes way more harm than good, and has terrible consequences, especially for normal folks like us who depend on cheap energy for daily life. Whenever you hear “cap-and-trade” or any other version of the phrase, we suggest running in the other direction.
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