Brian C. Murray Ph.D. is director for economic analysis at the Nicholas Institute for Environmental Policy Solutions and research professor at the Nicholas School of the Environment. His work focuses on the economics of climate change policy, including the design of cap-and-trade policy elements to address cost containment and inclusion of offsets from traditionally uncapped sectors such as forestry and agriculture.

 Q - What is Carbon Trading?

Over the last forty years or so, governments have increasingly relied on market-based approaches  to find the most cost-effective ways to reduce pollution.  In many cases, economic tools are more efficient than so-called “command-and-control” regulations, which unilaterally mandate that individual firms reduce their own emissions to a fixed and specific level.

A “cap-and-trade” system uses markets to efficiently reduce pollution, in this case greenhouse gases.  The “cap” means that a limit is placed on emissions and the cap is ratcheted down over time.  “Trade” means that the government issues or sells allowances that coincide with the emissions in the cap and then allows businesses subject to the cap to trade these allowances among themselves.  When companies must pay to emit (usually by the ton), they have a financial incentive to pollute less. Firms that emit below their limit can sell their extra pollution credits to companies expecting to surpass their limit. In the early 1990s, a cap-and-trade market for sulfur and nitrogen pollutants was created in the U.S. Since then, emissions from coal burning that cause acid rain have been substantially reduced at a cost far below that originally expected.  Europe is now using cap-and-trade to meet its obligations under the global greenhouse gas agreement.

The true pollution reduction occurs gradually over many years, as the “cap,” or national emissions limit, drops. Firms know that as time passes, there will be fewer and fewer pollution credits available to them, the price of emitting will go up, and they will need to find more efficient ways of doing business and invest in cleaner technologies to run their operations.

Q - Does this mean shutting down the coal industry?

No. The U.S. generates more than half its electricity from burning coal. This fuel is plentiful and inexpensive, compared to others, and will be with us for the foreseeable future. The problem is that coal has a carbon content much higher than oil and natural gas. When you hear or read about “clean coal,” for the most part that’s shorthand for “carbon capture and storage.” This suite of technologies allows utilities to catch the carbon before or after the fuel burns, and transport it to underground sites where it is stored geologically. There’s a lot of money and attention looking at CCS these days, but it’s not a commercially viable technology yet. The expectation is that the technology will reach commercial viability, driven primarily by the type of price signal that a cap-and-trade program can create. Coal is very important and economically valuable asset to many stakeholders, which is why so many people are trying hard to make CCS work. For the moment, coal keeps many Americans’ lights on and refrigerators running.

Q - Fuel economy standards have become a joke. How would this giant government effort be any different?

Fuel standards belong to an older regulatory approach, the “command-and-control” regulatory framework discussed earlier. One of the problems with fuel standards is they mandate fuel use rates (miles per gallon), but do not control total fuel use or emissions. Drivers may wait to replace their old less-efficient cars or drive more (especially if fuel economy goes up), thereby negating some of the reductions accomplished by improving fuel standards.  Our focus needs to be on total emissions.  Climate change is a problem much bigger than tailpipe pollution. Energy released from burning carbon fuels powers not only vehicles, but nearly everything we do, our entire economy and way of life. So, to change our energy system requires a more flexible and comprehensive framework than unilateral government mandates. An economic or market approach empowers participants in the economy to fix their own contributions to a problem as best they see fit – and take advantage of new business opportunities along the way.

Q - What's in this for American industry? Aren't they beat up enough already?

Clearly these are difficult times for much of American industry. But the solution to its  problems won't be found by ignoring long-term technology needs.  Science is telling us we need to address the climate problem and the longer we wait, the worse the problem is going to be, and the more expensive it will be to solve it.  Virtually all of the economic modeling of climate policy proposals shows that these problems can be addressed and  still allow the economy to grow at the type of long-run robust rates we have enjoyed for decades.  Part of this stems from using a flexible system such as cap-and-trade to address the problem.  But there are also a number of ways to address the problem – increasing energy efficiency – that can greatly reduce costs and even enhance performance for many sectors of the economy.

There will be some difficult transitions for some sectors and regions. Hardships need to be addressed by investing in those areas of the economy and training workers for the types of skills that will be in higher demand in the low-carbon economy. Modernizing our industrial heartland is necessary with or without a carbon policy, but doing this with climate protection in mind can serve complementary and self-reinforcing purposes.   

We also need to consider the cost of inaction.  If some of the more troubling climate predictions come to pass, our society hasn’t seen anything yet. It’s very important to keep in mind the potential for catastrophic climate change. There is a trade off between the costs associated with today’s decisions and the future benefits of these actions.  Almost all investments take time to recoup. It’s just impossible to know exactly what the trade offs between benefits and costs are, which makes climate policy so difficult.  But it is probably best to view any costs borne today as an insurance premium against future catastrophic losses.

Q - Why carbon? Aren't methane and some other gases far worse problems?

“Carbon” is shorthand for “carbon dioxide,” or CO₂, the gas most responsible for manmade global warming. Methane (CH₄) is also a carbon-based gas. Each molecule is composed of one carbon atom and four hydrogen atoms. Some emitted methane comes apart in the atmosphere, producing carbon dioxide and water -- itself also a potent warming gas. It’s true that methane absorbs more than 20 times as much heat as carbon dioxide. The other greenhouse gases are more powerful than CO₂ as well – nitrous oxide (laughing gas), and the fluorinated gases. But the sheer volume of CO₂ emissions makes their cumulative effect much more powerful than the effects of all the other.

(Nicholas Institute Senior Associate Eric Roston co-authored these responses. His book "The Carbon Age: How Life's Core Element Has Become Civilization's Greatest Threat," discusses the science behind these policies.)

Next Month:

Marine biologist Craig McClain, assistant director of science at the National Evolutionary Synthesis Center (NESCent) answers questions about evolution and the briny deep. Email a question to dukeresearch@duke.edu