Can cap and trade work in the US?

Key takeaways

Washington State's cap and trade system represents a significant test case for U.S. climate policy.
Challenges in public awareness and understanding of the new regulations can hinder effective implementation.
Market dynamics play a pivotal role in the success and political sustainability of cap and trade systems.
Political opposition can intensify when economic impacts, such as rising gas prices, affect consumers directly.
Local initiatives can influence broader climate strategies and policy acceptance across different states.

Summary

The Ambitious Cap and Trade Experiment in Washington State

This episode explores the ambitious cap and trade system introduced in Washington State aimed at addressing climate change. The system allows a cap on total carbon emissions while auctioning permits for companies to trade, theoretically incentivizing emissions reductions. The discussions reflect on the potential impacts this legislation could have, positioning Washington as a test case for other states considering similar initiatives. The way it aims to address the economic implications of climate restrictions is highlighted as a critical factor for its success.

Challenges Encountered with Implementation

Luke Martland, the chief counselor responsible for implementing this cap and trade system, faced significant challenges. A large part of the episode discusses the unpreparedness of major polluting businesses in Washington regarding the new regulations. This lack of awareness necessitated a comprehensive outreach and education effort to ensure companies understood their obligations and the workings of the cap and trade market.

Market Dynamics and Economic Implications

A key focus of the episode is on the auction mechanics of the cap and trade system. The first auction brought in significantly higher prices than expected, thus increasing the financial burden on consumers and raising questions about the system's long-term political sustainability. Discussion centered around how market forces and the balance of supply and demand could affect the efficacy of the cap and trade system, including the political ramifications of rising gas prices.

Political Reactions and Future Viability

As the cap and trade system began to affect gas prices, political pushback intensified. High-profile opponents emerged, highlighting the potential for the initiative to be challenged and possibly repealed in the coming elections. This segment emphasizes the importance of public perception and political pressure in maintaining support for environmental policy.

Lessons and Broader Implications for Climate Policy

The episode concludes with reflections on the broader implications of Washington's cap and trade experiment for climate policy across the United States. Luke Martland articulates the need for states to take action in combating climate change, and how successes or failures in Washington could serve as lessons for other states. Washington's approach is highlighted as both a potential model and a cautionary example, illustrating how localized efforts can contribute to larger climate goals.

Show notes

Recently, the state of Washington embarked on an ambitious new plan to combat climate change. Taking a page from economics textbooks, the state instituted a statewide "cap and trade" system for carbon emissions. The state establishes a cap on the total amount of carbon pollution it is willing to allow each year, and then gives away or auctions off carbon emission permits that add up to that total. Companies can then trade those permits on the open market.

Economists love cap and trade plans because they establish a limit on carbon emissions while letting the market find the most efficient way for decarbonization to occur. But cap and trade has had a hard time catching on, especially in the U.S.

The stakes are high for Washington's new plan. If it succeeds, it could convince other states to implement their own versions, but if it fails, it might serve as a cautionary tale. On today's show, we take a look at how Washington's grand experiment with cap and trade is faring.

This episode was hosted by Keith Romer and Kenny Malone. It was produced by Emma Peaslee and edited by Emily Siner. It was fact checked by Sierra Juarez and engineered by Valentina Rodriguez Sanchez. Alex Goldmark is Planet Money's executive producer.

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