Based on an obscure economic theory that gained prominence in the 1960s at the University of Chicago, cap-and-trade was embraced by the Reagan administration as a replacement for regulating air emissions. Since that time, it has gained acceptance among environmental organizations and the largest environmental funders.
Unfortunately, cap-and-trade can undermine existing environmental law while, as NASA scientist James Hansen observes, it “perpetuates the exact pollution it is supposed to eliminate.” Indeed, while existing pollution laws like the Clean Water Act call for the elimination of pollutants from our air and water, cap-and-trade begins by accepting the right of people to pollute and then paying them not to. In this sense, trading is like paying someone not to rob your house.
But cap-and-trade has problems even under its own skewed assumptions. It leads to price volatility for businesses and can often put the cost for pollution cleanup on those least able to afford it. Cap-and-trade too often relies on offsets, which have dubious value, and on a permit allocation scheme that benefits current polluters at the expense of everyone else. And all of this takes place in an environment that trades current problems for future pollution reductions, which are far from guaranteed to actually occur. Cap-and-trade substitutes economic abstractions that may or may not work for actual regulation and collective action to reduce environmental harm.