What, exactly, is cap & trade? I’ll try to illustrate it here by example. Let’s say the government decides that the citizens are getting too fat. They declare that the ideal weight is (170 lbs. men, 110 lbs. women = average 140 lbs.) So it announces a cap and trade program allowing only (140 lbs. x 300 million citizens) 42 billion lbs. of body weight for the country. But the government knows that the actual body weight is 50% higher than that, or 60 billion lbs. So it sells licenses to fatties who weigh more than 140 lbs. each, allowing for the extra 70 lbs. per fatty. Fatties who don’t want to purchase the licences are simply weighed, then fined or taxed. But in return they get a fat license.
Now comes the really clever part of the scheme. Fatties who lose weight can sell their fat licences to skinnies who want to gain weight, thus providing an incentive for fatties to slim down. But what incentive do the skinnies have to get fatter and pay for fat licences? Very little, indeed.
The cap and trade scheme relies on the government reducing the cap year by year. So if the first year’s cap is 70 lbs per person and the cap is reduced to 50 lbs, then fatties who haven’t reduced their weight may have to pay for more fat licences. They can pay the government for these, or they can purchase them from fatties who have lost weight and don’t need so many fat credits on their licences.
The fat licenses become less valuable as fewer and fewer skinnies decide to pork up and as fatties become skinnies. So the government reduces the cap more rapidly to maintain the value of fat licences and thus the incentive to lose weight and of course the revenue the government gets from selling the licences. All is sunshine, the nation is losing weight rapidly and soon everyone will be skinny.
Advocates for cap & trade as CO2 mitigation such as the Environmental Defense Fund claim that cap & trade was successful in ending acid rain a few years back, so it should be used now. But, it is widely reported, the European Union’s cap & trade scheme has been a complete failure leading to economic damage and no significant CO2 reductions. Much of this failure is attributed to the inevitable corruption that results from government control of the economy. Politicians like to get
paid re-elected, industries like to get favors.
Let’s analyze this cap and trade scheme for what it really is. The whole scheme requires three things to work. It requires artificial scarcity (the cap), coersion (requirement to report weight and buy licenses for excess weight) and government price controls. None of these is a characteristic of a free market or a free society.