Larry Summers on Cap-and-Trade


Summers has problems with a cap-and-trade approach to reducing carbon emissions.

He leaves us dangling with a promise that next month (his FT column comes out

monthly) he will reveal a better alternative. But without knowing what that

better alternative is, it’s worth looking at his reasons for mistrusting a cap-and-trade


  1. A cap-and-trade approach, while binding in theory, might not be in practice.

    This is a danger, but I’m not too worried about it. Summers uses the example

    of the Maastricht Treaty, which broke down when it became obvious that some

    countries wouldn’t meet the targets. But in the case of Maastricht, there

    wasn’t a strong constituency which would lose a lot of money if the targets

    were allowed to lapse. A cap-and-trade system creates a whole infrastructure

    of exchanges and traders who are financially invested in those caps –

    not to mention the polluters who spend a lot of money on buying emissions

    rights, or who make a lot of money by cutting their emissions and selling

    their rights. Once that infrastructure is in place, there will be huge pressure

    to make sure the caps stay in place, not only from environmentally-aware voters,

    but also from large companies.

  2. "The limited impact of Kyoto is evinced by the fact that carbon

    permits are now selling in the range of a negligible one euro a ton."

    It might be true that Kyoto has had a limited impact: this is reason to expand

    it. But it’s emphatically not the case that low carbon prices are

    a sign that Kyoto isn’t working. To the contrary, low carbon prices are what

    you would expect if carbon caps worked very well, and people found cheap and

    effective ways to reduce their carbon emissions. The reason that carbon prices

    are low in Europe today is because a lot of coal-fired plants went offline

    much more quickly than people had expected. That’s good news. Carbon permits

    further in the future are much more expensive. Things are generally working

    as one would hope and expect, and what errors have been made in the past,

    surrounding estimates of existing pollution levels, can be fixed in the future.

  3. "Carbon markets are invitations to engage in pork-barrel corporate

    subsidy politics on a massive scale."

    A common criticism, but a false one. If I’m a big polluter and I get allocated

    a hugely valuable store of emission rights, how am I supposed to be able to

    monetize those rights? The only way to do so is by stopping polluting –

    basically, I’d have to close down my plant. What Summers fails to realize

    here is that the assets that get handed out under a cap-and-trade scheme are

    offset by even bigger liabilities: no one gets more emission rights than they

    actually pollute. Under cap-and-trade, everybody starts off "short",

    even if the rights are allocated rather than auctioned.

  4. "While in principle emission permits could be auctioned, in practice

    they are always allocated administratively."

    We’re in the very, very early days of cap-and-trade: this kind of generalization

    is impossible to make with a straight face.

  5. "The clean development mechanism has resulted in substantial payments

    for emissions reductions that would have occurred anyway or could have been

    achieved at negligible cost. There is even reason to think that certain industrial

    gas emissions may have been increased so that credit could be claimed for

    their abatement."

    I haven’t heard the latter claim: I’d like to see Summers’s evidence for it.

    But certainly a cap-and-trade scheme can and should be refined in order to

    give credits to early adopters, and to make it hard to game the system. On

    the other hand, the whole point of the cap-and-trade scheme is that

    it incentivizes people to do low-cost emissions reductions. If it achieves

    that, then so much the better.

  6. "The most serious problem with the Kyoto framework is that it is

    unlikely to generate substantial changes in developing country policies…

    The truth about climate change policy is that developing countries are where

    most of the future action has to be."

    What’s certain is that developing countries won’t do anything unless and until

    the developed countries take the lead on this issue. What’s more, a good global

    system of offsets, where developed-country polluters can claim credit for

    emissions reductions in the developing world, would solve some if not all

    of these problems. In any case, unless Summers can reveal next month a scheme

    which the developing world is sure to sign on to (probability: 0%), it’s surely

    a good idea to get moving now where at least it’s possible to make a start

    on these issues.

I do look forward to what Summers proposes next month, although it can’t be

a good sign that he admits at the outset that emissions reductions will be lower

under his scheme, at least in the short term, than they would be under a cap-and-trade

system. As a general rule, I think it’s a good idea to do as much as we can,

as soon as we can. "It won’t solve everything, therefore we shouldn’t do

anything" is just a silly argument.

This entry was posted in climate change. Bookmark the permalink.