South-Western College Publishing - Economics  
Nation's First Cap-and-Trade System to Begin in 2009
Topic Environment and the Economy
Key Words cap-and-trade, emissions reduction, price, permit, cost.
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Reference ID: A163024660

News Story Ten states in the Northeast have joined together to create the first cap-and-trade carbon emissions program in the US. Organized by then-NY governor George Pataki in 2003, the group extends from Maine to Maryland, and includes Pennsylvania as an observer. Other states around the nation are watching over the program as well.

Under a cap-and-trade program, the total level of carbon emissions is capped, and permits are created to account for the allowable amount of emissions. Firms then have the ability to trade permits, increasing and decreasing their allowable emissions. Firms with low emission reduction costs can reduce their emissions, and sell their permits profitably. Firms with high emissions costs can purchase those permits not used by the more efficient firms. Modeled on the EU's program, the states aim to avoid the pitfalls of that program. The program begins in 2009, and states will have to maintain permits for their emissions, to be checked over three-year compliance periods. The ultimate goal is to reduce emissions by ten percent over ten years.

The permits will be sold at auction, and can be traded between companies. Carbon offsets may also be purchased, but the range of offsets will be limited. Five categories of offsets, in which energy efficient programs are created, reducing the emissions of firms further. Only 3.3 percent of total emissions can be offset; the remainder must be covered by permits.

The California government, as well as that in surrounding states, is looking at this program with significant interest, as there is some movement to create a similar program on the west coast. No one wants to reinvent the wheel, so the successes and failures of this program will go on to determine the next cap-and-trade emissions program in the country.

Discussion Questions:
1. Why is a cap-and-trade system of emissions reduction more efficient than a standard command-and-control model?
2. How can a cap-and-trade model consistently reduce overall emissions?
3. Over time, as total emissions continue to fall, what should happen to the price of a permit?
Multiple Choice/True False Questions:
1. True/False. This cap-and-trade system extends throughout the US.

2. Under a cap-and-trade system, permits
  1. Move from the highly efficient firms to the less efficient firms.
  2. Move from the less efficient firms the more efficient firms.
  3. Tend not to be traded in practice.
  4. Are only given to one firm at the beginning.
3. Over time, as emissions decline, what should happen to the price of an emissions permit?
  1. Increase.
  2. Decrease.
  3. Not change.
  4. Become more elastic.
Source Fairfield, Hannah, "When Carbon is Currency," The New York Times. May 6, 2007.
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