Understanding Cap & Trade

Cap & Trade is an outgrowth of the Carbon Dioxide/Global Warming Hoax. No logical scientific explanation has ever been made to correlate carbon dioxide with global warming. In spite of this, an arbitrary assumption has been made that carbon dioxide emissions from the burning of fossil fuels should be controlled.


The Cap & Trade program is an international governmental effort to control carbon dioxide emissions. For Western Europe, the intention of the European Union (EU) is to reduce carbon dioxide emissions by 20% from 1990 levels, in the next 30 years. The mandatory scheme applies to 11,000 industrial installations, including power plants and major chemical facilities across all 27 member states, plus others. For our explanation, A hypothetical example will be used to explain how Cap & Trade works. The example involves the EU, because more data is available from that region.

Assume that there is an electrolytic steel manufacturer in Belgium. Electrolytic steel is produced by melting recycle steel from automobiles and other sources. The melting uses electricity. To generate the required electricity, our example company uses a steam turbine powered by the burning of coal. The coal burning liberates carbon dioxide.

Our example company burns sufficient coal to generate 10,000 tons of carbon dioxide per year. The EU Commission has "capped" the plant to emit only 9000 tons of carbon dioxide per year. This means under normal operations our example company has three options. It could reduce production of steel to require only enough coal to emit 9000 tons of carbon dioxide, invest in alternate energy equipment to capture carbon dioxide or reduce coal use by substituting wind, solar, etc. to reduce carbon dioxide emission, or lastly purchase from the EU Commission a "right" to emit the extra 1000 tons of carbon dioxide. Of the three choices, the obvious best one is the cheapest, and assuming there is no intention to decrease production of steel, that depends on the comparative prices of installing new equipment or purchasing the "rights".

In addition to the arbitrary and mandatory cap of carbon dioxide emission on our example company, the EU also sells the additional "rights". It has been said that a "rights" price of between $68 and $135 would be required, if industry as a whole is forced to shift into a new low-carbon footing. However, the actual price per ton of carbon dioxide in 2011 was $23, and more recently down to a new low of $5.20. This means that our example company could buy a 1000 ton "right" for $5200 per year. This is obviously a cheaper way to go for our example company than to try to purchase new equipment. The EU still gets $5200, but nowhere near the $23,000 they obtained in 2010 or the desired $68,000 to $235,000.

Why has the carbon dioxide "right" price dropped so low? Two reasons. Industrial production is down in the EU, because of the recession. In addition, the EU has flooded the market with "rights" through many free offerings of a political nature. To increase the carbon dioxide "right" price, the EU is proposing to delay the sale of 900 million "rights" originally scheduled for sale in 2013 to 2015 for four years. In 2013 just over 50% of the 2.1 billion metric tons of "rights" provided by the EU will be sold, with the remainder allocated free of charge. Note that even at the low price, this is almost $5.5 billion going into the coffers of the EU commission.    

One might ask why the EU doesn't lower the cap levels of carbon dioxide emission for individual producers. This would automatically require more "rights" purchasing and simultaneously increase the "rights" price. The answer is political objection. There are a number of countries with significant coal production and coal usage, of which Poland is a prime example. In addition, the chemical company conglomerate strongly objects, because it would increase its energy cost.

In spite of these difficulties, the Cap & Trade scheme will likely continue to progress, because it is a sidestep to direct taxation and still accomplishes feeding large amounts of unjustifiable tax money into EU coffers. The UK, which is not part of the EU has ignored the Cap &Trade issue and applied a direct tax of $7.90 per ton of emitted carbon dioxide on the production of electricity consumed by certain industries, including chemicals.

Note again that all of the above is based on an unjustified theory that carbon dioxide emissions are responsible for global warming.