The debate over global warming has finally shifted from whether it is indeed happening (it is) and if human activity is causing it (it is) to what we need to do to avoid the worst consequences of climate change. If we stabilize atmospheric concentrations of global warming emissions at or below 450 parts per million (ppm) of carbon dioxide (CO2) equivalent, we have a 50 percent chance of preventing the Earth’s average temperature from rising 3.6 degrees Fahrenheit (2 degrees Celsius) above pre-industrial levels. Scientific evidence suggests this would avoid some of the worst, irreversible consequences of global warming.

According to a Union of Concerned Scientists (UCS) analysis, even with aggressive action by industrialized and developing countries, the United States would have to cut its emissions by at least 80 percent from 2000 levels by 2050.

This daunting task will require countries to quickly deploy clean energy technologies and develop new low-carbon technologies, using a combination of policies to help spur these activities. Foremost among them is a well-designed cap-and-trade program, which would put a price on carbon emissions that reflects the costs of global warming. This must be coupled with strengthened efficiency standards, incentives, and public investment in clean technologies and infrastructure. A carbon tax—which has attracted some attention recently on Capitol Hill—also could be part of the solution, but it would not guarantee necessary emissions reductions without an emissions cap in place.
 
How a Basic Cap-and-Trade Program Works

Under a cap-and-trade program, the federal government would establish an economy-wide cap on emissions, measured in metric tons of CO2 equivalent, and tighten that cap over time. It then would issue “emissions allowances” that correspond to a specific number of metric tons of carbon. The total number of allowances would match the cap.

The program would require electric utilities, refineries, and other sources of global warming pollution to have an allowance for each ton of their emissions. Polluters would acquire allowances during the initial distribution or by trading for them in an “allowance market.” This market would enable polluters that are able to reduce their emissions relatively cheaply to sell allowances to those that are unable to do so, thereby establishing a market price for carbon. The program would create an incentive for polluting facilities to implement the most cost-effective emissions reduction options and, by putting a price on global warming pollution, encourage investments in new low-carbon technologies.

Key Elements of a Well-Designed Cap-and-Trade Program

All cap-and-trade programs are not equal. Only a well-designed program would achieve the necessary emissions reductions and protect the environment and the economy. The key elements are:

• Stringently capping emissions, with firm near-term goals. As discussed above, the United States must reduce its global warming pollution emissions at least 80 percent below 2000 levels by 2050 to avoid the worst effects of global warming. Delay in taking action would require much sharper cuts later, making it much more difficult and costly to meet the necessary target. A near-term goal of a 15 percent to 20 percent reduction from current levels by 2020 is essential.
• Including as many economic sectors as possible. The cap should cover all major sources of emissions, either directly or indirectly. They include electric utilities, transportation, and energy-intensive industries, which together comprise some 80 percent of U.S. global warming pollution, as well as fossil fuel emissions from the agriculture, commercial and residential sectors.
• Including all major heat-trapping gas emissions. Those include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6). Emissions of different gases could be combined according to their global warming potential using the CO2-equivalent method.[1]
• Auctioning all (or a substantial majority of) allowances rather than giving them away to emitters. An allowance auction would allow the market to set the price of carbon, and it would be the most efficient and equitable way of distributing allowances. Giving away too many allowances would distort the market and could result in windfall profits for polluters.
• Using auction revenues for the public good. The government should invest auction revenues in clean, renewable energy technologies and energy efficiency measures. Revenues also could compensate low-income families, provide transition assistance to workers or economic sectors that are disproportionately disrupted by the program, and help communities adapt to the unavoidable effects of global warming.
• Excluding loopholes that undermine the integrity of the program. To be effective, a cap-and-trade program should not include a “safety valve” setting a maximum price for allowances and requiring the government to sell unlimited allowances to polluters once that price is hit. This would undermine the integrity of the emissions cap, and reduce the incentive for investments in clean technology.
• Including strict criteria for cost-containment mechanisms such as offsets and borrowing. Offsets would allow regulated polluters to purchase emissions reductions from unregulated sectors or countries that do not have caps, instead of reducing an equivalent amount of their own emissions or buying allowances from other regulated facilities. (For example, a regulated electricity generator could pay an unregulated landfill company to capture its methane emissions and use those emissions reductions to “offset” their own.) Borrowing would allow facilities to emit more global warming pollution if they promise to make sharper emissions cuts later.
  
  Offsets and borrowing could lower the cap-and-trade program’s short-term costs for polluters. However, by postponing emissions reductions from major emitting sectors, they would delay much-needed technological innovation and jeopardize the program’s long-term goals. Any offsets should meet rigorous standards to ensure the activities are permanently removing carbon from the atmosphere beyond what would happen in a business-as-usual scenario. Borrowing should not reach unsustainable levels that threaten the program’s viability.