I’m a strong advocate for a price on carbon, but I have serious reservations about cap & trade. I’m thrilled that climate policy is finally getting off the dime, but I wish enthusiasm were focused on a carbon tax instead. Consider this:
| Jurisdiction | Instrument | Started | Operational | Status |
| EU | Cap & Trade | 2003 | 2005 | Phase 1 overallocated & underpriced; still wrangling over loopholes for subsequent phases |
| British Columbia | Tax | Feb 2008 | July 2008 | Too low to do much yet, but working |
| Sweden | Tax | 1991 | 1991 | Running, at $150/TonCO2; emissions down |
| RGGI | Cap & Trade | 2003 | 2008 | Overallocated |
| Norway | Tax | 1990 | 1991 | Works; not enough to lower emissions substantially |
| California | Cap & Trade (part of AB32) | 2007 | Earliest 2012 | Punted |
| WCI | Cap & Trade | 2007 | Earliest 2012 | Draft design |
The pattern that stands out to me is timing – cap & trade systems are slow to get out of the gate compared to carbon taxes. They entail huge design challenges, which often restrict sectoral coverage. Price uncertainty makes it difficult to work out the implications of allowance allocation (unless you go to pure auction, in which case you lose the benefit of transitional grandfathering as a mechanism to buy carbon-intensive industry participation). I think we’ll be lucky to see an operational cap & trade system in the US, with meaningful prices and broad coverage, by the end of the first Obama administration.