Climate policy, in Congress, has become synonymous with cap-and-trade proposals, spawning an endless and only occasionally illuminating debate. Is cap-and-trade the only affordable, market-friendly way to introduce a carbon price and harness the efficiency of the market? Or is it a sham that promotes bogus offsets in place of real emission reductions, and gives away valuable allowances to influential industries?

Here’s a different idea about what’s wrong with cap-and-trade in practice: The caps on emissions have frequently been set too high to make any difference. Both the claims of low costs for cap-and-trade policies and the complaints of their ineffectiveness could result from non-binding caps – that is, legal “limits” on emissions that are higher than the amount industry plans to emit. No change in behavior is required, and it’s no surprise that this lowers costs; it’s cheaper to do nothing than something.

In a careful analysis of existing programs, University of San Diego law professor Lesley McAllister found that some, such as Phase I of the EU’s carbon trading scheme, had caps that exceeded emission levels throughout the life of the program. In other cases, such as sulfur trading under the U.S. acid rain program, the caps were set much higher than emissions in the early years, so that banking of unused allowances postponed the effect of later, somewhat lower caps. The current recession has lowered production and emissions so much that some well-intentioned plans, such as the EU’s reduced cap for Phase II of carbon trading, may also turn out to be non-binding in practice.

The solution is to set emission caps low enough to actually require major investments in new, emission-reducing technologies (wasn’t that always the plan?); to limit banking of unused allowances; and to periodically revisit the caps, adjusting them downward whenever feasible. Or, of course, give up on cap-and-trade and try something different.

Lesley McAllister and I are both member scholars of the Center for Progressive Reform, a great source for analysis and commentary on a wide range of issues about public policy, law, and the environment.

Advertisements