NCPA - National Center for Policy Analysis

Trading CO2 Permits Will Not Solve Global Warming

November 30, 1999

In December 1997, the Clinton administration agreed to an international accord in Kyoto, Japan, committing the United States to reduce greenhouse gas emissions from energy use. The principal greenhouse gas blamed for human caused global warming is CO2 released by the burning of fossil fuels.

To comply with the Kyoto Accord, the Clinton administration has proposed a tradable CO2 emission permit plan. Supporters argue that an emissions trading scheme would be a less expensive way of reducing emissions than the other primary option, a carbon tax on all fuels, because it allows emissions reductions to be concentrated at sources where it is least expensive.

However, economist Margo Thorning points out that "Carbon taxes could be imposed instead of tradable permits: there should be, in principle, no difference in energy prices under the two alternative systems."

Under either system, energy prices will rise. For instance:

  • The Department of Energy estimates that carbon permit prices would be equal to a carbon tax of $348.00 per ton in 2010.
  • WEFA, Inc., an econometrics forecasting firm, estimates that the cost of carbon permits would top $265.00 per ton.

The DOE estimates that these permit prices would increase the cost electricity by up to 86.4 percent, gasoline by 52.8 percent, home heating oil by 76 percent and natural gas by 147 percent.

Permits are also unlikely to reduce greenhouse gas emissions since developing countries -- which will emit the most CO2 in the future -- are not required to reduce emissions under the treaty, and thus will not be part of the trading regime.

Source: Roy E. Cordato, "Global Warming, Kyoto, and Tradable Emission Permits," Studies in Social Cost, Regulation, and the Environment: No. 1, September 1999, Institute for Research on the Economics of Taxation, 1730 K Street, N.W., Suite 910, Washington, D.C. 20006, (202) 463-1400.


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