The Political History of Cap and Trade

How an unlikely mix of environmentalists and free-market conservatives hammered out the strategy known as cap-and-trade

In the '80s, the challenge was to limit acid rain from power plants; now, it's to cut carbon emissions. (Walter Bibkow / Photo Library)
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Whether cap-and-trade would curb acid rain remained in doubt until 1995, when the cap took effect. Nationwide, acid rain emissions fell by three million tons that year, well ahead of the schedule required by law. Cap-and-trade—a term that first appeared in print that year—quickly went "from being a pariah among policy makers," as an MIT analysis put it, "to being a star—everybody's favorite way to deal with pollution problems."

Almost 20 years since the signing of the Clean Air Act of 1990, the cap-and-trade system continues to let polluters figure out the least expensive way to reduce their acid rain emissions. As a result, the law costs utilities just $3 billion annually, not $25 billion, according to a recent study in the Journal of Environmental Management; by cutting acid rain in half, it also generates an estimated $122 billion a year in benefits from avoided death and illness, healthier lakes and forests, and improved visibility on the Eastern Seaboard. (Better relations with Canada? Priceless.)

No one knows whether the United States can apply the system as successfully to the much larger problem of global warming emissions, or at what cost to the economy. Following the American example with acid rain, Europe now relies on cap-and-trade to help about 10,000 large industrial plants find the most economical way of reducing their global warming emissions. If Congress approves such a system in this country—the House had approved the legislation as we went to press—it could set emissions limits on every fossil-fuel power plant and every manufacturer in the nation. Consumers might also pay more to heat and cool their homes and drive their cars—all with the goal of reducing global warming emissions by 17 percent below 2005 levels over the next ten years.

But advocates argue that cap-and-trade still beats command-and-control regulation. "There's not a person in a business anywhere," says Dan Esty, an environmental policy professor at Yale University, "who gets up in the morning and says, ‘Gee, I want to race into the office to follow some regulation.' On the other hand, if you say, ‘There's an upside potential here, you're going to make money,' people do get up early and do drive hard around the possibility of finding themselves winners on this."

Richard Conniff is a 2009 Loeb Award winner for business journalism.

About Richard Conniff
Richard Conniff

Richard Conniff, a Smithsonian contributor since 1982, is the author of seven books about human and animal behavior.

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