Will Putting a Price on Carbon Save the Environment?

Millions of people around the globe have become increasingly concerned about environmental changes brought about by global warming. Ironically, the brutal winter of 2014-15 is an example of this “global warming” in action. Brought about largely by carbon emissions, many are trying to find practical ways to encourage companies to reduce their carbon footprint without cutting into their bottom line.

Millions of people around the globe have become increasingly concerned about environmental changes brought about by global warming. Ironically, the brutal winter of 2014-15 is an example of this “global warming” in action. Brought about largely by carbon emissions, many are trying to find practical ways to encourage companies to reduce their carbon footprint without cutting into their bottom line.

One of the most popular suggestions by economists is cap and trade. Under a cap and trade arrangement, the government sets a limit (or “cap”) on the amount of carbon a company can produce each year. The cap is relatively high in the beginning while businesses adjust, and then gradually lowers to a more useful level. Businesses that engage in practices from which they emit carbon and other greenhouse gasses would be required to hold a permit in order to continue operations.

These permits are the key to the cap and trade model. The permits would be limited in number and initially allocated to companies most in need of them in order to continue operations. Others that wished to join the market or continue with their greenhouse gas emitting enterprises would then be able to acquire permits from those who already hold them. Scarcity would drive up prices for these permits, and the consumer would ultimately bear that expense. As the price of greenhouse gas emitting products rose, demand would fall, bringing the overall level of emissions down to more tolerable levels.

While most economists agree that this is likely the most effective way to begin reducing polluting gas emissions, many feel that cap and trade is simply a way to put a price on carbon. They fear that consumers will pay the price for companies’ bad practices rather than having those companies change their business models to become less polluting. Some believe this will lead to enormous political pressure that will ultimately cause the cap to rise and the creation of additional permits. In essence, an economy based on carbon credits will be born, subject to all the same pressures and mistakes of a typical financial economy.

Unfortunately, with stakes as high as the continued habitability of the planet, there is little room for error in devising a workable climate change program. As a result, despite its flaws, cap and trade may be the best option for combating climate change. Indeed, it may be the only option that has a chance of making a dent in greenhouse gas emissions, even if only for a limited time, as consumers and businesses have shown little interest in sacrificing the status quo in order to fight global warming.