Co-authored by Lissa Domoracki and Carrie Gilbert
[Part 2 in the Shriver Center’s series on Climate Change and Low-Income Communities]
The build-up of carbon and other green-house gas emissions in the atmosphere causes climate change. If this build-up continues, it is estimated that the average temperature in the United States could increase by as much as 9 degrees Fahrenheit by the end of this century. The negative effects of climate change are numerous: increased heat waves, increased incidence of heat-related disease and illness, increased risk of floods, droughts, and fires, rising sea levels, etc. With federal climate change legislation on the horizon, many people are talking about cap-and-trade and how it can reduce our carbon emissions. But, what exactly is cap-and-trade?
Cap-and-trade is a simple story of supply and demand. As of now, there is no limit on carbon emissions. Power plants, refineries, and industrial plants may emit as much carbon as they want without cost. Cap-and-trade changes this, putting a price on the right to emit carbon.
Under a cap-and-trade system, companies must turn in an allowance for every ton of carbon emitted the previous year. The number of allowances issued determines the level of or the “cap” on carbon emissions. Initially, some allowances are given to companies for free while others are auctioned off. If fewer allowances are issued, either for free or at auction, than tons of carbon currently emitted, companies subject to cap-and-trade will either have to reduce their carbon emissions or obtain more allowances.
Depending on a company’s circumstances, the company may find it more cost-effective either to reduce carbon emissions or to buy emissions allowances. Cap-and-trade systems create an open market where allowances may be bought and sold. For example, Company A may be able to very easily and cheaply reduce its carbon emissions beneath its allotted allowance level while it may be very difficult and expensive for Company B to reduce its carbon emissions at all. In this circumstance, Company A could reduce its carbon emissions enough to be able to sell its excess allowances to Company B on the open market. Regardless, carbon emissions are reduced sufficiently to meet the cap.
Over time, the number of allowances issued will decrease, lowering the cap on carbon emissions. As this happens, the purchase price of an allowance on the open market should increase. To illustrate, let’s go back to Company A and Company B. Both companies have fewer allowances allotted to them than at the onset of the cap-and-trade program, and Company A has already utilized the easy and cheap methods to reduce its carbon emissions. Therefore, if Company A is going to reduce its carbon emissions sufficiently to sell excess allowances, it must undergo more difficult and costly changes than before. In turn, Company A is only willing to sell its allowances at a higher price. Company B has made no changes, previously choosing to buy allowances on the open market. At some point, the price of allowances on the open market will exceed Company B’s cost to reduce carbon emissions, and like Company A, Company B will make the changes necessary to reduce its carbon emissions.
For some companies, this may mean closing a plant and shifting production to a plant that emits less carbon, constructing a new plant that emits less carbon, or ceasing operations altogether. Take, for example, the Fisk and Crawford coal-burning power plants located in the working-class Pilsen and Little Village neighborhoods of Chicago. Both of these plants, because of their age, are exempt from the Clean Air Act. As is often the case, low and moderate income people bear the brunt of the pollution from plants like Fisk and Crawford as they tend to be located in or near low and moderate income communities. According to a Harvard School of Public Health report, the air pollution from the Fisk and Crawford plants is linked to 40 deaths, 550 emergency room visits, and 2,800 asthma attacks annually. Under a cap-and-trade system, it will likely become prohibitively expensive to continue the operation of these heavy carbon-emitting plants, benefiting the low and moderate income communities situated near them.
Overall, a cap-and-trade system advances several climate change objectives. First, the cap allows for predetermined and definite carbon emission-level reductions through the issuance of a limited number of allowances. Second, the trading of allowances provides for the reduction of carbon emissions in the most cost-effective manner by encouraging the implementation of quick and easy carbon emission reduction strategies early on. Third, cap-and-trade will make heavy polluting plants cost prohibitive to continue operating, yielding important health benefits to the low and moderate income people who tend to live near such plans. Fourth, cap-and-trade, properly structured, can accomplish yet another essential policy objective -- the protection of low and moderate income households from bearing the brunt of added consumer costs that will result from limiting carbon emissions through cap-and-trade. More on this subject in a future article in our series on Climate Change and Low-Income Communities.