What are some economic problems with cap and trade?



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    The most ambitious carbon cap-and-trading experiment to date began in the European Union in 2003. About 9,400 large factories and power stations in 21 member states were targeted, and the EU Greenhouse Gas Emissions Trading Scheme was established to trade pollution rights. The credits were based on what companies estimated their emissions would be — but a 2006 audit revealed that companies’ and power plants’ actual emissions came in below estimates. Some said the firms had inflated their earlier emissions estimates, and thus all had credits to sell. This situation produced a surplus. Once it was known that the number of available permits exceeded demand, prices slumped. Indeed, fear that there are too many permits for sale (combined with concerns about the EU’s regulatory shortcomings) have effectively collapsed the market. The early evidence suggested that the trading scheme financially rewarded companies — mainly petroleum, natural gas and electricity generators — that disproportionately emit carbon dioxide. The pollution credits given to the companies by their respective governments were booked as assets to be valued at market prices. After the EU carbon market collapsed, accusations of profiteering were widespread. In fall 2006, a Citigroup report concluded that the continent’s biggest polluters had been the winners, with consumers the losers.

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