February 17, 2011

You Won’t Fix the Environment by Going Green. ~ Audrey Mangan

Business as usual. Photo by Qi Wei Fong.

But you will by understanding economics.

We at elephant love to promote mindful living, especially when it comes to respecting the environment. Our approach to reaching beyond the choir is governed by a principle of accessibility—suggest how one can take baby steps to reduce one’s carbon footprint, and maybe people will realize they can care about the planet without having to tattoo ‘dirtbag treehugger’ on their arms.

Individually composting, biking and recycling—while absolutely important for reducing your daily impact and spreading behavioral change throughout a community—can only go so far. The truth of the matter is that until it costs the global economy more to emit CO2 than not, we will keep barreling towards a future in which the world is very hot. The solution, as I’m sure most of you know by now, is to internalize what is currently a market externality.

In plain English, we need to make the price of, say, an apple, reflect its true cost of production: not just the fertilizer, land, labor, water, and transportation that went into delivering you your Honey Crisp, but also the cost of damages to the environment from the greenhouse gases that were released by that delivery truck, the production of fertilizer, and that commercial fridge. Only then will the global population have the incentive to reduce their carbon footprint.

What does this solution look like? A carbon tax, cap-and-trade (also referred to as emissions trading), or some hybrid of the two. Thanks to recent elections, both phrases are politically polarizing, to the point of spreading ignorance about what either option would actually mean for the consumer. At the same time, environmental economists hardly make it easy for the average American to want to read more than the first sentence of cap-and-trade theory, and so many are left in the dark while politicians and network talking heads poison popular opinion with inaccurate representations.

So, what is cap-and-trade?

In short, it is a government-regulated market mechanism that incentivizes producers of energy to reduce their carbon footprint. How do you do that? By making the cost of producing that carbon-based energy more expensive than producing it some other, renewable way. Here’s what happens:

  1. The government sets an economy-wide limit (the cap) on the amount of carbon that can be emitted by distributing a set number of allowances amongst emissions-heavy companies.
  2. If one company can more easily (i.e. cheaply) switch over to renewable energy production, it puts its allowances up for sale, where companies who need more allowances buy them at the going price (the trade).
  3. Economy-wide, the amount of CO2 being pumped into the atmosphere stays below the cap because the right to pollute costs more than getting energy some other way. Do energy prices go up? Yes, at least until we get better and more cost-effective at getting our energy from renewables. But that’s the whole point—encouraging people to use less energy.

While searching my favorite environmental blogs for help explaining cap-and-trade, I found this video, in which this dude explains it quite well in under 4 minutes:

If you weren’t able to quite able to process Eco Geek’s speedy explanation before it was over, check out this lovely infographic from WellHome, a company that performs home energy audits. It visually maps out what cap-and-trade is and how it works without once resorting to a supply and demand curve (quite impressive, really). Get ready to scroll:

There, was that so bad? Feel free to share with friends and family who perhaps don’t spend their coffee breaks reading blogs on eco-living. For more handy visual representations of environmental concepts, go to WellHome’s website.

It’s already begun.

At this point, you might be wondering if anyone has tried to implement this supposedly magical fix for all our problems. Quite a significant someone, actually: the European Union. Phase I began in 2005, with every single EU country participating. How has it worked for them? Their emissions are in decline.

That’s not to say there haven’t been hiccups; the difficulty governments have in predicting exactly how much carbon firms are going to emit (which is dictated by how the economy is doing in general) makes it hard for them to set an effective cap. This has recently resulted in the over-allocation of permits in light of the current economic downturn, meaning emissions credits have simply gone unused. Most recently, the virtual market was hacked by cyber thieves, stealing 2 million credits and causing the market to shut down until only last week. Clearly, there are still kinks to work out in what is still an emerging market.

Cap-and-Trade in the US.

So, what is the state of cap-and-trade today in Congress? Sadly, languishing. A climate bill that included a cap-and-trade scheme was in the works in 2009, but by the spring of 2010 opponents of the bill had successfully misbranded it “cap-and-tax,” stopping Obama from even mentioning the environment directly in his recent State of the Union. For a full recap on where it currently stands, read the NY Times Topic.

If you feel so inspired to read a more detailed academic review, Harvard environmental economics professor Rob Stavins presents a considerably accessible argument for cap-and-trade (as opposed to a carbon tax). He also recently contributed to a paper on the subject from the Pew Center on Climate Change, which can be downloaded here.

Power to the People.

What can you do to help build a real solution to climate change? Vote.


Audrey Mangan is a recent east coast college grad-turned-Coloradoan trying to find new ways to enjoy the outdoors and connect with her inner child every day.

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