Advantages and Disadvantages of Using Emissions Permit System - Essay Example

 Advantages and Disadvantages of Using Emissions Permit System Introduction The once hostile sphere of environmental policy has turned full cycle over the past two decades to a remarkable adoption of economic principles hitherto pushed to the periphery and lamped together in a long academic wish list. First proposed by Dales in 1968, Emissions trading (commonly known as cap and trade) has gained considerable ground as a presumptive scheme for curbing global carbon pollution. Free emissions of greenhouse gases into the atmosphere are recognizably the main cause of global warming. Behind the overwhelming support for marketable permits for atmospheric greenhouse emissions, advocates are no less passionate on the consensual acknowledgment that an effective climate change policy has to adopt a pricing strategy on such permit emissions (Baumol and Oates, 1988). A broad spectrum of concerned individuals and corporations are in agreement over one basic fact: a price-tagged emission of global-warming greenhouse gases is an idea whose time is ripe. Whether not available for now, legal, binding pricing mechanism on the use of traditional fossil fuels seems all but inevitable in the 21st century. Nevertheless, pricing carbon emissions remains in dispute among policy makers and academics voicing backing to the old command controls. Evidently, nations only possess limited experience with cap-and-trade system in controlling greenhouse emissions. This paper endeavors to highlight the intrinsic worth and costs of implementing a cap and trade policy in pollution abatement. Emission trading permits with a pricing scheme on carbon usually strives to achieve two interrelated but beneficial ends: discouraging— with increasingly inhibitive economic costs — the use of traditional sources of energy such as oil, natural gas and coal, to inspire the development of innovative renewable sources of energy that are less costly to the environment (Wills, 2006). Cap-and-trade policy instruments place progressive harsher limits on the usage of fossil fuels by conditioning pollution limits from industrial power plants among other major emitters of greenhouse gases through licensing. Extra emissions above the prescribed limits are surcharged prohibitively. In contrast to the traditionally regulatory command models that were rather rigid with regards to the requisite specified outcomes irrespective of the costs incurred, the prohibitive costs in cap and trade systems provides the needed incentives to either shift to the best alternative sources or to make more than necessary steps for compliance (Kurkowski 2006). Assuming that the current CO2 emission levels of 1.5 GtC attracts a zero price for carbon in the absence of regulation. A requirement by the Kyoto protocol for a cap target of 1.2 GtC suggest that permits of equal value allows the market to clear at the price of $50 per ton. Quite simply, geographic emission trading schemes set targets consistent with carbon stabilization levels (for instance 450 ppm). The cap is subsequently divided into shares that are then allotted to individual industries and entrepreneurial companies in the form of tradable permits to emit; permits that can either be provide for free or auction by the government at a fee. Cap-and-trade system drives efficiency via a cost minimizing price-mechanism that incorporates the market forces of demand and supply appropriately setting the price of carbon released into the atmosphere as opposed to the cumbersome traditional tax regimes that enlisting paid regulators fixing levies on emissions without necessary demands on abatement limits (Kurkowski, 2006). With private ownership established in either case, emission trading system integrates Ricardo’s principles of comparative advantage with inbuilt flexibility that allows polluters to either sell shares in excess of their polluting capacity or buy when faced with deficits (Weitzman, 2007). More generally, the trading system accommodates credits from other geographies thereby providing wider options of trading partners. A carbon market affords efficient emitters an opportunity to save on costs and free up the much needed resources by those facing steep abatement costs in cutting their pollution volumes below the set caps, thus enabling emissions reductions at the lowest total cost, more so to benefit of individual economies. Emissions trading are hailed as the ultimate environmental recommendable policy of reducing environmental pollution to the points capable of mitigating the effects of global climate change given the mechanistic long-term policy credibility. It not only provide direct links to policy instruments that deliver desired, local based (community based) environmental objectives, but also possess policy options easily adaptable in extended carbon-constrained environments, perhaps regionally or globally. More importantly, it extends least cost abatement capacity at the international scale (Weitzman, 2007). Conceivably, global warming is a global problem. As such, more countries are gradually adopting carbon emission pricing schemes to aid their efforts in reducing pollution. Noteworthy, whilst the traditional abatement methods, particularly the carbon levies, can theoretically be harmonized with emissions trading schemes either locally or internationally, it is more costly, let alone acceptance, to synchronize carbon tax models used by countries on an international scale. This leaves emission trading schemes as the best bet for a mutual, resolute understanding for global action to global warming (Sovacool, 2011). No wonder the United States under the stewardship of president Obama has decided to take a lead role in implementing “cap and trade” favorable policies: While the use of marketable permits appears progressively successful in lowering emissions levels at minimal costs so far wherever implemented (for instance in Euro zone and the United States), the hitherto expected enthusiasm from policy makers and academics has subsided into negativity with stronger advocacy for the old command controls. Arguably, the system is at fault as a short term potential avenue to over pollute (Harvey 2007). Pollution permits under the cap and trade systems are allotted on the basis of past emission volumes of each firm. Companies seeking permits/renewals generally have their way out in inflating their past emission data to secure higher allocations. Termed ‘grandfathering’ by Michaelowa and Butzengeiger (2005), the system not only result in blatant over-allocations for over-capacity emissions, but also leads to markets with low liquidity, which translates into low permit pricing signals. Emission trading systems are instituted through political processes, which are susceptible to pressure from lobbyist groups resulting into pro-special-treatment enactments that are too lenient for tangible actions (Stavins, 2008). The EU Emission Trading System (ETS) has been criticized for its lopsided, generous allotment plans to agriculture, aviation and transport based firms, thus enabling windfall gains on carbon credits hitherto granted for free. This is somewhat rewarding the greatest polluters and pushing the costs to poor economies (Sovacool, 2011). Another significant hurdle with emissions trading schemes is the ease of shifting blame from regulated blocks to non-incorporated regions (Swift, 2004). Steel manufacturing industry, for instance, has traditionally relied on the blast furnace method, which is comparatively cheaper than the alternative sources considered environment friendly. Accordingly, purchasing carbon credits becomes a rather expensive option with regards to production costs. Such companies within the Euro zone are increasingly opting to outsource the needed raw materials from low cost regions of South American and African countries not under EU ETS regulations ETS (Beauman, 2007). In effect, EU ETS intention of reducing emissions has been forfeited by mere shift of responsibility. Finally, emission trading fails the danger of offset cheating (Swift, 2004). Palm oil plantation in Indonesia that occurs after substantial destruction of the natural environmental features is just but an example of offset cheating that allows granting of permits without real reduction of emissions. Such cases can possibly expand with the inclusion of African countries where substantial damage has been orchestrated by the multinational companies, the very rich, industrialized nations’ creations. Emissions trading seem to be a brilliant strategy of curbing greenhouse gas emissions. With its implementation still in infantry stages, flaws that threaten global adoption of the system are numerous. The world climatic condition is at crossroads, and any delay from taking stern measures only stocks more problems whose effects are already underway. References Baumol, W.J. and Oates, W.E (1988) The Theory of Environmental Policy. Cambridge: Cambridge University. Beauman, Chris (2007), “Climate change poses stern challenge” Financial Times 8 Oct. p.4. Harvey, Fiona (2007), “Doubt about regime” Financial Times 18 Sep. p.3. Kurkowski, S. J. (2006) “Distributing the Right to Pollute in the European Union: Efficiency, Equity, and the Environment.” New York University Environmental Law Journal 14 (698), pp. 700-701. Michaelowa, Axel and Butzengeiger, Sonja (2005) “EU Emissions Trading: Navigating between Scylla and Charybdis” Hamburg Institute of International Economics; Climate Policy, 5 (1), pp. 1-9. Sovacool, B. K. (2001) The Policy Challenges of Tradable Credits: A Critical Review of Eight Markets. Energy Policy, 39 (2), pp.575–585. Stavins, R. N. (2008) “A Meaningful U.S. Cap-and-Trade System to Address Climate Change.”  Harvard Environmental Law Review, 32 (2), pp.293-371. Stone, A. (2009) “Inside Obama’s Green Budget.” Forbes Magazine , [online] 27 Feb. Web. 12 Dec. 2012. Swift, B. (2004) “Emissions Trading and Hot Spots: A Review of the Major Programs.” Environment Reporter, 35(19), pp.1–16. Weitzman, M. L. (2007) “A review of the “Stern Review of the economics of climate change.” Journal of Economic Literature, 45, pp.703–24. Wills, I. (2006) Economics and the Environment: A signaling and incentives approach, 2nd ed, St. Leonards NSW: Allen and Unwin. Read More