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Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate. If every polluter’s emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear.
This problem is no different than any sort of environmental regulation. Business firms have no incentive to go beyond where they are required to go. The carbon cap being proposed tightens as we proceed into time.
The carbon tax that is held to be the most sacred policy has the same problem. Once the tax is set firms will reduce emissions to the point where the additional cost of abatement rises above the tax. At that point firms will prefer to pay the tax and continue to emit.
Further criticism of cap-and-trade:
Worse yet, polluters’ lobbyists ensured that the clean air amendments allowed existing power plants to be “grandfathered,” avoiding many pollution regulations. These old plants would soon be retired anyway, the utilities claimed. That’s hardly been the case: Two-thirds of today’s coal-fired power plants were constructed before 1975.
Cap and trade also did little to improve public health. Coal emissions are still significant contributing factors in four of the five leading causes of mortality in the United States — and mercury, arsenic and various coal pollutants also cause birth defects, asthma and other ailments.
Note that both are not problems with cap-and-trade, both are political. You can avoid the first by not allowing exemptions for certain sources. You can avoid the second with a tighter cap.
The rest of the piece discusses Hansen's preferred alternative:
There is a better alternative, one that would be more efficient and less costly than cap and trade: “fee and dividend.” Under this approach, a gradually rising carbon fee would be collected at the mine or port of entry for each fossil fuel (coal, oil and gas). The fee would be uniform, a certain number of dollars per ton of carbon dioxide in the fuel. The public would not directly pay any fee, but the price of goods would rise in proportion to how much carbon-emitting fuel is used in their production.
There is nothing in this paragraph or the results in the following two paragraphs that could not be achieved with cap-and-trade.
And this is a problem of dynamic capping, not cap-and-trade, per se:
Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country’s. Instead it allows somebody else to buy a bigger S.U.V. — because the total emissions are set by the cap.
Ignoring the fact that Hansen does not seem to acknowledge that cap-and-trade would raise gas prices and provide the bigger SUV guy an incentive not to buy it, cap-and-trade and a carbon tax provide incentives for dynamic efficiency: if a household or firm can find cheaper ways of doing things then they will since it generates profit. As costs fall the cap should tighten in order to achieve economic efficiency.
