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Cap-and-Trade Throws a Wrench into the Gears of Green Consumerism

Last week, Severin posted a great piece on household electricity consumption. Armed with a simple metering device and your energy bill, you can easily measure how your various household appliances affect your energy consumption and your pocketbook.

Understanding the link between your appliance use and your energy bills is important. I hope Santa brought everyone a kill-a-watt to use for this purpose.  But for many households, cost savings alone provide insufficient motivation to reduce energy consumption.

Purveyors of energy efficiency improvements often highlight environmental benefits – “save energy and fight climate change!” – to motivate households to pursue efficiency improvements:


Source: Team Energy Star website

As with other voluntary contributions to the public good, finding ways to reduce your household’s environmental impacts via energy consumption choices can generate a “warm glow” – the positive feeling that results from doing your part to advance some larger social cause. (Notably, a recent PNAS paper finds that highlighting the environmental benefits of energy efficiency can have the opposite effect for some consumers).

What many people may not realize, however, is that cap-and-trade programs can throw a wrench into these attempts at green consumerism. In principle, once a binding cap on emissions has been imposed,  any noble steps you take to reduce your personal emissions footprint will be offset by some other regulated source. In other words, if aggregate emissions have been effectively capped by a regulator, you can take action to reduce your own energy use and associated emissions, but this will free up permits to be used somewhere else.

Trading warm glows for warm toes in California?

When cap-and-trade came to California last year, it affected the way we thought about electricity consumption in our house.  Before the cap was introduced, the climate change impact of a marginal reduction in our household energy use may have been miniscule, but it was not zero.   Keeping our electricity consumption down thus offered an (admittedly pathetic) means of alleviating some of our deep-seated climate guilt.

Last January, emissions from California electricity providers and large, emissions-intensive industrial facilities were brought under a greenhouse gas cap-and-trade program. Once emissions from the electricity sector were capped, electricity conservation became less appealing for us.  On cold nights we have started to run electric space heaters in our home office and baby’s bedroom to keep things warmer. Twinkling Christmas lights brought more joy than carbon-guilt this holiday.

Cap-and-trade notwithstanding,  efforts to slow climate change via household energy consumption choices need not grind to a halt. Here are some factors to keep in mind as you weigh your energy consumption options:

  • Glow California! Some have argued that the real importance of California’s cap-and-trade program is that it may encourage other jurisdictions to follow suit. As Catherine  pointed out in a recent interview, a year’s worth of greenhouse gas  emissions reductions in California are wiped out in one week of Chinese growth. The importance of regional climate change initiatives has less to do with reductions in regional emissions and more to do with proof of concept.  If California can demonstrate how to set and achieve emissions reduction targets, this can increase the likelihood that other actors will pursue similar strategies, thus advancing global mitigation efforts.  Under a binding cap, you may not be reducing global carbon emissions when you upgrade to a more efficient appliance, but you will be helping California to successfully meet its emissions reduction targets.
  • Focus your efforts on uncapped sectors and sources (such as aviation): If your carbon footprint looks like mine, the vast majority of your carbon footprint comes from air travel. Although aviation emissions are covered by the EU ETS, they are not covered by the California cap. Cutting back on your air miles (outside the EU) will translate into real emissions reductions.
  • Finally, there is a good chance that total emissions in California will be below the cap….  To provide some degree of compliance cost certainty, California policy makers have established a price floor that rises slowly over time. Aggressive complementary measures (such as the renewable portfolio standard and energy efficiency standards), together with a sluggish economy, are driving demand for emissions permits down.  It is possible – if not likely- that prices will hit the floor. If this happens, the cap-and-trade program will function like a tax regime. Aggregate emissions will no longer be pre-determined by policy-makers, and the link between household level electricity consumption decisions and aggregate environmental impacts will be restored.

In sum, if you are concerned about climate change, it is worth paying attention to the policies and regulations that determine how your consumer choices relate to the bigger picture.



9 thoughts on “Cap-and-Trade Throws a Wrench into the Gears of Green Consumerism Leave a comment

  1. Why not just have a price floor established by the ARB’s willingness to buy back credits? When ARB auctions credits to emitters, there would be both a reserve price and a max quantity, and then ARB buys them back at some price less than the initial auction clearing price (maybe also less than the reserve price). I’m not sure exactly how the buyback mechanism would best be organized, but I’m sure some auction people would have ideas. Sorry, I don’t know anything about this literature/theory, but I find the existence of this problem a little perplexing.

    Maybe one problem is that the participants we had to bribe to get into the system can just sell all their credits and exit. But relative to the current dispensation, that’s just optics, right?

    I don’t see what’s appealing about guaranteeing (no less than) a certain amount of emissions. Wouldn’t we have to think that reductions below the cap threshold have no social benefit in order to believe that simple cap-and-trade is optimal?

    • One clarification and one correction:
      (1) If the relevance to the original topic is not clear…. When you forego emitting, I take it that price of emissions drops to to the willingness to pay of the next person in line (the next increment in the demand curve), and the emission still occurs. But this process stops at the point where WTP = buyback price.
      (2) Last paragraph: the simple cap-and-trade is not guaranteeing that emissions hit the cap: it’s guaranteeing that reductions relative to counterfactual baseline do not occur if the baseline is below the cap (I think). Which is probably optimal if there is no social cost of emissions below the cap.

  2. Of course your home conservation and efficiency actions matter. Only a deeply flawed or purely theoretical cap and trade regime would negate the benefits of your actions. It is possible that the CA regime is flawed, but it is definitely not theoretical. However, your conclusions rely on the theoretical assumptions of cap and trade. These include: perfect measurement of emissions, perfect fungibility of mitigation options, perfect foresight into the future when setting the cap, perfect information in the marketplace for mitigation measures, and no market innovation to exploit imperfections. Any real world regime will be imperfect and those imperfections matter a lot! Here are a few ways your actions matter:

    1) Even in a theoretical system, you are lowering the cost of mitigation compliance. This should be enough to warm an economist’s heart, but as has been pointed out in other comments, the real world cap is managed and if current targets are easily achieved, it should (will?) be tightened.
    2) Not all reductions are created equal. One of the heroic assumptions required to make cap and trade work is that we can accurately measure emissions and mitigation and that different types of reductions are so similar that they can be traded. The reality is that every program has “hot air” categories of mitigation that are not a effective as others – typically new technologies that are not as good as believed, types of mitigation that are hard to measure, apparent mitigation that is actually just shifted off the books out of state, or the result of businesses adapting their processes to appear to produce extra emissions and then mitigating those. Because it avoids these pitfalls, conservation is a very high quality source of mitigation. When you conserve, you are ensuring that CA’s mix of mitigation is higher quality.
    3) Learning and market transformation. One of the goals of cap and trade is to provide pervasive and long-term price signals that transform the structure of the economy over time. Your domestic conservation and efficiency activities can help to create demand for innovations to develop more efficient products and those that support better control and decisions (including the kill-a-watt). You are working on altering habits and setting an example for others, including your kids, neighbors, and family. Done right, your personal mitigation will play a role in the innovation and market transformation required to achieve our mitigation goals. If we meet all our mitigation responsibilities in a subset of sectors of the economy, we will not be prepared (with products, professionals, and know-how) to mitigate in the others when they become critical to ongoing success. We are also hoping for happy surprises, which will only emerge from sectors actively engaged in mitigation.
    4) Complimenting supply strategies. The grid balances supply and demand everywhere all the time. This is enforced by the invisible hand of physics, but a cap and trade regime does a very poor job encoding this requirement into its incentives. A renewable, flexible, and reliable grid will not function like our current system. If your conservation takes on a pattern that helps preserve supply side flexibility, you are helping to bridge the gap between the grid of the present and the grid of the future.

    Mitigation is an applied discipline, so we must be careful not to practice it using theoretical (and falsifiable) assumptions.

    • Thanks, Sam. A thoughtful and on-point response as per usual. Some responses to your response.

      Your points (1) and (3) more clearly flush out my intended Glow California point. Even if we are not reducing aggregate emissions, we are helping the state to demonstrate that emissions targets can be met, and helping to keep the costs of that demonstration down.

      Your point (2) is important, but I question your assumptions on this one. In principle, a comprehensive cap-and-trade program breaks the link between household level electricity consumption decisions and aggregate environmental impacts. As you note, in practice, things are not so clear cut. For example, because existing and planned cap-and-trade programs are not comprehensive- they affect only a subset of the emissions sources that contribute to environmental problems- emissions leakage, resource reshuffling, co-pollutants, unmeasured upstream emissions, co-pollutants all muddy the waters somewhat.

      To make this point more clearly, consider the following example. Suppose that, for every 1 pound of CO2e associated with electricity consumption in California, x < 1 pounds of emissions are actually measured and accounted for in California’s GHG emissions trading program accounting. This under-accounting could be due to resource reshuffling, inadequate accounting of upstream emissions, etc. Let’s call x the counted emissions fraction. A marginal reduction in your electricity consumption means that less abatement is required in some other covered sector.Let's call the counted emissions fraction in this other covered sector y You assert that this conservation will marginally reduce emissions because the measured fraction in this other sector will be smaller than the measured fraction in the electricity sector (i.e. y<x). I am not so convinced…seems to me that this relative ordering is ambiguous and really depends on what is on the margin of the abatement supply curve.

      Agreed on (4). And there are some exciting developments in information technologies to help consumers act on this in real time. A shameless plug for my student, Gavin McCormick and

      Thanks for reading.

  3. Carbon Lighthouse, group that engineers efficiency improvements in large buildings, confronts this problem and purchases carbon offsets as a, not very satisfactory, way to deal with it. I’d not heard of the mechanism Chris Busch mentions above, but something like that is needed.

  4. Another effect may be that, as the cost of meeting the cap falls, regulators and legislators may reduce the cap. The opponents cannot argue that the tighter cap will be disastrously expensive, if the current cap is being met for a few dollars/T.

  5. Meredith, thanks for this valuable post about an unfortunate side effect of cap and trade. Let me mention one other wrinkle — California’s cap and trade program has a mechanism by which the cap can be lowered to account for voluntary renewable energy. Read about it here:

    Click to access chapter7.pdf

    I’m not sure exactly how it is being implemented or if it will really be user friendly at the consumer level, but thought it might be worth adding to the conversation.

    • Unfortunately, the CARB’s attempt to enable the retirement of allowances for voluntary renewable energy purchases is fundamentally flawed. At the outset, CARB set aside a fixed number of allowances under this program for each year between 2013 and 2020. Although these allowances can be permanently retired if a qualifying voluntary renewable energy purchase is submitted, they will not be added back to the cap if they are left unused.

      CARB’s implementation of this program has rendered it completely meaningless. Since expected future voluntary renewable energy purchases have already been used to lower the cap, the actual volume of voluntary purchasing is irrelevant. If actual volumes are below the forecasts, any remaining unused allowances (already set aside) will not be resold into the market for use by emitters. If actual volumes are above the forecasts used to develop the set aside, no additional allowances will be made available under the program.

      A consumer wishing to reduce the amount of CO2 emissions permitted under the cap should just buy allowances directly and retire them.

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