California’s Carbon Cap and Trade

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California’s Carbon Cap and Trade

In: Economics
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Cap and trade is an interesting alternative to the carbon tax, it basically works like this:

You get a tax based on your industry for every tonne of CO2 you release over a certain limit (that depends on your industry). I don’t know the actual number for california but its a pretty high tax.

So what they do is hold auctions for ‘lots’ which are basically a get out of tax card for a given tonne of CO2 (or equivalent). They auction of millions of them but never quite enough, and you trade/sell lots you buy with other companies/people if you want. If you are unable to get all the lots you need to cancel out the tax then the government will sell them to you at a way higher rate than what you would have gotten at auction. The lots are generally good for about 3 years (if I remember correctly).

The mechanism of the auction itself is really interesting too (from here on out I’m assuming its like ontarios former cap and trade program so someone can correct me if california is different).

First they set and minimum bid, do lowest bid price, and have it a blind bid. so if you have 10 lots, and party A bids 10$ (each) for 5 lots, party B bits 5$ for 4 lots, party C bids 3$ for 6 lots, and party D bids 2$ for 10 lots.

Party A wins 10, party B wins 4, Party C wins 1, and they all pay 3$ since that was the lowest winning bid (party D gets nothing).

Its been really successful actually as an alternative to a straight tax.

Our atmosphere has become a dumping ground for CO2, and most companies don’t have to pay to pollute our atmosphere. They have to pay to get rid of garbage and hazardous chemicals, but not to pollute the air. All they have to do is pollute below the limits the EPA or state sets. There is little incentive to lower their pollution beyond that.

A carbon tax is just a flat tax on how much CO2 companies emit. “Cap and trade” takes this a step further and sets a limit on how much CO2 each company can emit, and in order to emit more, they can raise their limit by buying portions of the limits from other companies.

This allows cleaner industries to make money by staying clean, as their CO2 emissions will be low enough that they can sell their excess “CO2 Limit” to dirtier companies. This of course also means that dirtier industries will spend more money increasing their limits.