Cap and Trade vs Command and Control as a means of reducing greenhouse gases

Yesterday I finished this essay for the International Environmental Law class I am doing at the University of Strathclyde. The EU cap and trade system has come in for a  lot of criticism so it was interesting to get to grips with the topic.

I took a broad approach and looked at various areas of debate;

the moral dimension- is it ethical to trade in pollution?

the market- an examination of whether market forces can lead to environmental protection

costs- an analysis of which method of regulation would be more expensive

incentives for businesses- a look from an economics perspective

the impact on developing countries- whether one system is better in terms of sustainable development in poorer countries

here is my conclusion:

At first, a traditional command and control style regulatory approach may seem the best option. For one thing, it means that no-one profits from trading greenhouse gas emissions. There is also the argument that the atmosphere is a public space and should not be a commodity. Also, the problems of the first phase of the EU ETS have led to many to argue that market forces are not the solution to environmental problems.

However, such a viewpoint is wrong for several reasons. Although trading in pollution may seem unethical, businesses will only take care of the environment when there is an economic incentive. Also, if an emissions trading system means that greenhouse gases decrease, then it is a price worth paying.

The first phase of the EU’s attempt at cap and trade can accurately be said to have been a disaster as many serious mistakes were made. The allocation of carbon permits was far too generous and a crash in prices allowed companies to buy up carbon permits at rock-bottom prices. However, the second phase has seen more stable prices. In the future it must be ensured that there is a genuine scarcity of permits and there should be auctions rather than free allocations. These mistakes from the first phase should be seen as those of the EU rather than inherent features of all future cap and trade schemes. There is no reason why lessons could not be learned and the system improved.

Another advantage of using cap and trade is that there is an absolute limit on emissions. With a command and control there is not this safeguard and there is always the danger that emissions could rise.

Also, cap and trade gives businesses an incentive to reduce greenhouse gases as they can then sell their surplus permits for a profit. Under command and control, companies would have no economic reason to go beyond minimum standards. Cap and trade has also been shown to be cheaper as it gives companies greater flexibility in deciding how to reduce their emissions. One example of the cost benefits of cap and trade is the successful reduction of Sulphur Dioxide in the US.

The final reason that cap and trade is the better system is the Clean Development Mechanism which allows companies to offset any excesses emission reduction projects in developing countries. The vast majority of future greenhouse gas emissions are forecast to come from developing countries and so cap and trade offers an opportunity for investment in sustainable energy technology such as renewable energy and energy efficiency. Clearly such a system needs proper scrutiny and regulation but it represents an excellent opportunity to reduce the impact of developing countries on climate change as well as modernising their economies and increasing the number of high skilled jobs, modern infrastructure and technical knowledge.  A command and control would not have this advantage since it wouldn’t allow for this international exchange.

In conclusion, the mistakes of the first phase of the European Union Emissions Trading System must be rectified and not repeated by future schemes which look possible in the US and Australia. However, due to its maximum limit on emissions, greater efficiency, lower costs and the potential of the Clean Development Mechanism, cap and trade is a better option than command and control for reducing greenhouse gas emissions.

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