Cap and Trade

Primer:
Cap and trade is a fairly simple concept and is based upon the idea that carbon emissions can be traded. The first step is to establish a baseline for carbon emissions for every industry that is a major contributor to greenhouse gasses.

Energy companies are a fairly good example and in particular we might consider coal fired energy plants. A federal regulating agency (yet to be named or formed) would be tasked with establishing some normative level of emissions for all carbon emitters (that number could be based on an average of all emissions from all energy plants nation wide or it could be just the average for coal fired energy plants as in the example above). In any case a bench mark is established.

Because the benchmark is based upon an average, my particular coal fired energy plant might do better or worse then the established benchmark. If I am better than the benchmark then this constitutes a credit. If I am worse than the benchmark then I may suffer a penalty. Penalties often take the form of increased taxes (although they don't have to). If my coal fired energy plant is looking at a penalty, I may be able to reduce or eliminate that penalty by purchasing a carbon credit from the aforementioned coal plant that was beating the benchmark. Basically, that's it; a cap on emissions and trading credits.

What I think is the best aspect of this system is that the federal regulating agency can constantly move the benchmark down to encourage industry to more greatly reduce carbon emissions. Cap and Trade then creates it own incentive program for reducing CO2 (and other greenhouse gases) and makes it possible for the Obama administration to reach it stated goal of 80% reduction in carbon emissions by 2020. Another way to look at this is that carbon credits will become incredibly valuable assets that savvy industry leaders will take advantage of. In my mind this is a total windfall revenue stream; by reducing emissions in my business, I can then capture revenue from third parties without any additional effort. Yeah I'll take that deal.

So you know what would be super awesome? If we could all get in on this deal. Well as it turns out we just might be able to. The Chicago Climate Exchange provides a mechanism, like the New York Stock Exchange, where carbon can be traded. Admittedly, it’s a purely voluntary experiment at the moment, but the possibilities are inciting (to say the least). If you are a major greenhouse gas contributor then your seat on the Chicago Climate Exchange is assured, for the
rest of us there are a variety of ways to contribute. Enterprise businesses can certainly take steps to reduce their carbon consumption and trade that reduction on the exchange. And individuals can purchase carbon offsets for personal trading.

With any luck the Obama administration will tie the cap and trade proposal to the Chicago Climate Exchange (or some other similar entity) and all of us will not only be able to participate but we may in fact see real economic benefit.