Among those interested in addressing the problem of climate change, one of the primary debates is about the best way to induce the private sector to develop innovative technologies. Although some favor a simple carbon tax, the US' success with a cap-and-trade system has led to its use both in Europe and in regional systems within the US. A new analysis of past US programs, however, suggests that cap-and-trade hasn't quite been the success many think it is. Its rapid early gains have been followed by a period of stagnation.
The US implemented cap-and-trade systems in the 1990s as a response to the problem of acid rain. Chemicals produced by combustion of fossil fuels (primarily coal) had previously been regulated by standard environmental regulation. However, over the course of the 1990s, SO2 and NOx were both subject to a cap-and-trade system that gave industries the option of taking different approaches to the control of these emissions. All significant sources of these chemicals were given allowances targeted to keep the total emissions below levels deemed acceptable. Innovators that cut their emissions substantially could sell their allowances to sources that found it too difficult or expensive to do so.
On some levels, this was a significant success. Emissions dropped and the cost of reaching that goal turned out to be far less than many had predicted. But Berkeley's Margaret Taylor has now gone through the numbers and found data suggesting not all is as rosy as it appears.
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