So, the theory of Cap-and-Trade goes like this.
You set an upper Cap on Carbon Dioxide Emissions.
You dole out Carbon Dioxide Emissions Permits or Allowances. Or you sell them. Or you auction them.
Each year the amount of Carbon Dioxide Emissions Permits gets less and less.
Then a Market in Carbon will operate.
Those organisations and businesses who find it easy to cut Carbon Dioxide Emissions do that.
Then they trade their unused Carbon Permits or Allowances with those who find it harder to cut their emissions.
This Carbon Market, according to Economic Theory, should be the most efficient, that’s cost-efficient, in implementing the Carbon Cap.
So, if it’s cost-efficient, you would not expect the price of Carbon Permits to be very high.
The Carbon Traders would get rich, but nobody else should be badly impacted.
Yes, organisations and businesses will be expected to invest in making Carbon Dioxide Emissions reductions.
Which they won’t, of course. Which organisations and businesses will want to spend capital on cutting emissions ? For the corporates, that’s shareholders’ returns you’re spending ! For the organisations, including the governments, that’s peoples charges and taxes you’re increasing !
But anyway, that small problem aside, if Carbon Trading is so efficient, you should expect to see the price of Carbon coast along the sea floor, rock bottom, as people cut their emissions in order not to have to buy Carbon Permits.
And yet, and yet, even Nicholas Stern admits that this might not be enough to engender, motivate, incentivise investment into emissions cuts.
Nicholas Stern, and many others, now see that a floor needs to be set for Carbon Dioxide Emissions Permits, the lowest price at which Carbon can be traded.
If that idea gains momentum, the obvious question is : why not make it a Carbon Tax ? It would be effectively the same.