Cap & Trade in Future

Cap and Trade in Your Future
A cap and trade system for greenhouse gas emissions has come closer for many businesses. A recent effort to pass a cap and trade system in the U.S. Congress was shot down before the bill could gain much traction. Most politicians were reluctant to pass such a controversial measure just before the fall elections. However, another version is likely to appear after the elections are over.

Both finalists for the U.S. presidential race, Barack Obama (Democrat) and John McCain (Republican), favor cap and trade systems for controlling greenhouse gas emissions to mitigate the effects of climate change. In addition, President Bush has won agreement for a summit of 16 nations to discuss approaches to climate change before he leaves office. In any case, there will be fresh impetus to pass a cap and trade law in 2009.

Significant Shift in U.S. Policy
The introduction of a cap and trade system in the United States would represent a major policy shift within the U.S. and would hasten similar policy shifts around the world. If U.S. businesses were hit with a cap and trade system, they would pressure competitors and suppliers to accept similar restrictions.

The United States, Australia, China and India, were four major economies that did not sign the Kyoto Treaty, which set targets for reduction of greenhouse gas emissions for participating countries. Their absence from the treaty weakened the efforts of signatories like the European Union, Canada and New Zealand, and suggested that concerns about greenhouse gases were of little urgency.

However, accumulating scientific evidence on global warming and the reports of the United Nations Panel on Climate Change (UNPCC) have brought a major change in public attitudes towards global warming around the world. There is widespread agreement that action must be taken. There is much less agreement about what that action should be.

Basics of Cap and Trade Systems
While the details of cap and trade systems can vary, the basic principles are quite simple. Each industry and each firm in an industry is given a cap on the greenhouse gases that it can emit. That cap is lowered over time. Firms that lower their emissions below their cap can trade their "credits" to firms that exceed their caps. Governments or private companies have developed markets where such emission allowances can be traded. The system provides a profit incentive for firms to lower their greenhouse gas emissions.

How Agriculture Might be Affected
Animal agriculture is a major target because of the emission of methane gas by cattle and other livestock. For example, if the owners of a dairy herd failed to reduce methane emissions through use of different breeds or different feeds, they would have to buy emissions credits. For a relatively small herd, these costs could amount to tens of thousands of dollars.

The situation of orchard agriculture is more complex. Power and energy is used for many on-farm activities and for hauling, packing, storing and transporting product to market. These activities create emissions. However, trees absorb greenhouse gases. Other businesses can get credits for planting trees that would otherwise not be planted. However, planting trees is a necessary element of an orchardist's business. It is unlikely that orchardists would be granted credits for what is an integral part of their business.

How Would Caps be Set?
Caps can be set in two basic ways, either by fiat or by the market. Under the fiat system, governments or their agents would set the caps for each industry and firm in the industry, with those caps decreasing over time. This approach is open to political pressure and manipulation. The worst polluters push for the most lenient caps. The actual level of caps chosen owes as much to political clout as to careful measurement of pollution.

Caps can also be set by the market, for example, in an auction process. Firms would bid against each other for emission rights of so much per ton of emissions. The biggest polluters would have to bid up the price to ensure that they acquired sufficient rights to pollute. These higher costs would, in turn, give them a strong incentive to reduce their emissions in the future.

In the U.S. proposal, the U.S. government would run the auction and collect the proceeds, which it could then use to fund education, to fight wars or to subsidize farmers. The bidders in the auction would, in turn, pass on the costs of pollution permits to their customers. The government would get more revenue, consumers would pay more taxes and hope that they could get back some of those taxes from the increased government spending. This could be either a virtuous or a vicious cycle, and is one of the most contentious aspects of a cap and trade system.

The Trading Dilemma
Polluting firms can also trade their rights for offsetting reductions of greenhouse gas emissions by other firms. It may be more cost effective for one firm to continue to pollute but to pay another firm for equivalent reductions in pollution. However, under most schemes, the reductions in emissions have to be ones that would not otherwise have occurred. Under both EU and UN trading schemes, there has been concern that many of the projects approved as offsets, for example, in China and other developing countries, would have occurred anyway.

Certification of the legitimacy of offsets is also controversial. In a sense, the rules are being developed while the game is being played. It may take several years before rules and certification systems gain wide acceptability and credibility.

Preparing Now
Clearly, it will be to a firm's advantage to be prepared for future curbs in emission of greenhouse gases from its production, storage, packing, processing or distribution activities. Even if reductions are not mandated by government, it seems almost certain that they will be demanded by major retail customers who, in turn, are under pressure from their critics to clean up their entire supply chains.

Apple firms might consider investing some of the recent gains from two favorable marketing seasons in making their operations as "green" as possible. There may not be any great competitive advantage to being green, but there could be serious disadvantages for not being at least as green as the industry norm.

Dissenting Voices
While the media and public opinion appear to agree that climate change is the world's paramount problem and must be tackled at any cost, there are dissenting voices both about the extent of future climate change and about the best policies to address it.

One of the leading skeptics is Bjorn Lomborg, author of "Cool It: The Skeptical Environmentalist's Guide to Global Warming." In a Wall Street Journal article of May 22, 2008, he argued that favored approaches to combat global warming would be extremely costly, inefficient and of relatively low payoff compared to many alternative expenditures. In a world with many societal problems and scarce resources, money should be spent in areas that provide the highest return.

In late May 2008, a group of economists organized by Lomborg met in Copenhagen, Denmark , where they weighed 40 proposals to improve the world by spending $75 billion over the next four years. The five investments ranked most cost-effective in helping the world's poor were:

1. Providing vitamin A and zinc supplements to children in Africa and Asia.
2. Completing the WTO Doha trade round.
3. Providing iron supplements and salt iodization.
4. Expanded youth immunization.
5. Biofortification of seed stocks.

Mitigating global warming was ranked either 29th or 30th most cost-effective, depending whether or not mitigation was supported by increased expenditure on research and development. Lomborg and his group, the Copenhagen Consensus, argue that countries should set their priorities on cost-effectiveness, not on emotion.

Where Does Reason Lie?
The choices before society are starkly different. On the one side of the debate are proponents that argue that if climate change is not tackled immediately, the earth as we know it will become unsustainable for the human race. On the other side are those like Lomborg that argue for a more reasoned approach to climate change and other world problems.

Individual readers may have a strong belief about where the truth may lie. They may know how cautious, concerned or patient they should? Clearly, the better they understand all aspects of the climate change debate, the more likely will they be to contribute to sound business practices and future national policies

First published in the World Apple Report, Volume 15, No. 7, July 2008, page 1.

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