Saturday, June 27, 2009

Cap and Trade?

On Friday, the House passed the Waxman-Markey bill on energy and climate change. A signature piece of the legislation is "cap and trade."

As I understand it, cap and trade works like this. The government will hand out, for free, tokens. The tokens are used by companies to release carbon dioxide. Companies can only release as much CO2 as they have tokens.

After the initial token liquidation, companies needing more tokens must buy them on the market. Those companies who increase efficiency and emit less CO2, can make money by selling their tokens.

Will it work? I'm not sure. What happens if all companies decide to increase efficiency at the same time and cause token prices to drop? Would that prompt less efficient companies to buy up tokens, at a bargain, and start stuffing more CO2 into the air?

Cap and trade proponents will argue that the tokens will be forced to appreciate as they plan on gradually lowering the token supply (similar to how the Fed controls the money supply I would guess).

So where do I stand on cap and trade? I don't know. I'm always a proponent for increased efficiency. But I'm not always sure how to best accomplish it.

1 comment:

Anonymous said...

I heard Krugman talking about this yesterday. Apparently C&T worked to stop acid rain with high praise coming from the Economist magazine. It also cost 20 to 30% of the original estimated cost.