Tighten cap & trade to combat climate change
18th October 2006
Alan Whitehead, MP for Southampton Test, argued in the House of Commons climate change debate last Thursday, that the capping and trading of carbon emissions was critical in the fight against climate change but that for it to work effectively there needed to be strict quotas.
Dr. Whitehead said:
“In the context of environmental taxation, does the hon. Gentleman accept that capping and trading carbon emissions is a development from taxation, in which the market undertakes the work that taxation might otherwise do? Would he include in his analysis what is happening to European emissions trading and will he be active in ensuring that the emissions trading system 2008-12 really works?”
Carbon capping and trading works by allocating every company a quota for how much carbon they can produce each year. If one company uses less than their quota, they can sell the remainder of their quota to another company that uses more.
However, for the system to work, the overall quota on emissions must be sufficiently low to ensure that companies would get a ‘good price’ for their carbon. Moreover, carbon quotas must reduce in line with the overall reduction of carbon emissions. This ensures that the price of carbon remains at a level that encourages companies to reduce their emissions below the ‘cap,’ allowing them to sell some of their excess carbon quota for a good price, or ‘trade’ their surplus, which would be less appealing because of the cost implications, and therefore further encourage them to reduce their carbon emissions.
Dr Whitehead, went on to say that the principle of cap and trade could, and should, be extended within the UK as currently the scheme is purely an EU one. Reducing emissions by introducing a carbon market is preferable to universal higher taxes for two reasons. First, it maximises carbon reduction in those areas that are more able to do so, and secondly it is far more likely to change behaviour in the long term.
Dr Whitehead has also written an article exploring how we achieve a low carbon economy through economic incentives which will be published later this year.