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This was the topic of the Reuters/Point Carbon inaugural debate last week. The hosts took an audience poll before and after the debate, and there was a slight swing in favour of the 'against cap and trade' camp.  So what made their arguments so compelling?

Three core points. 

First, that the EU Emission Trading Scheme (EU ETS) has failed to reduce emissions. The ‘against’ camp argued that persistent over-allocation of permits has led to windfall profits and cheap carbon, encouraging the use of offsets as a replacement to EUA retirement.  They argued that almost all of the cuts required in Phase I of the EU ETS could have been achieved through offsetting and that any EU reductions in that phase were the result of increased industrial efficiencies, evidenced by a similar effect in the uncapped USA.

Second, that the EU ETS has failed to transfer green technology, via the offsetting mechanism, the CDM. The ‘against’ camp referred to a host of difficulties, including questionable quality of offsets and perverse incentives in developing countries to pollute more initially in order to gain carbon finance for stopping this pollution. Moreover, they argued that benefits to development were poor, as the vast majority of credits originate in rapidly industrialising countries, while the least developed remain in desperate need of investment.

Third, that the mechanism delays structural change: the flip-side of the current “cost-effective” mitigation being that we are postponing the costly and dramatic structural changes our economies require to decarbonise.  The ‘against’ camp supported abandonment of the CDM in order to achieve the EU’s 80% reduction by 2050 domestically.  They also argued that an obsession with the market monopolises policy agendas, crowding-out alternatives (e.g. taxation and direct regulation).

However, the ‘against’ camp failed to offer a feasible alternative.  Professor Gwyn Prins, LSE, advocated pursuing decarbonisation through incremental short term targets, foremostly energy efficiency and decarbonised energy provision, financed by dedicated ‘mini’ carbon taxes.  However, as the ‘for cap and trade’ camp successfully argued, 10 years were wasted on the ambition of developing an EU-wide carbon tax which never came to fruition, and the idea simply lacks political capital. Ultimately, the market is the only politically and financially viable alternative on a meaningful scale.

Hence, despite the slight swing against cap and trade during the debate, the majority of the audience remained in support, believing it is imperfect but is our best shot.

The ‘for’ camp argued that cap and trade lays the foundation for all other abatement strategies by providing a carbon price. They pointed out that even in its first and most problematic phase, the EU ETS was nonetheless responsible for reduction of 2.5-5% of EU emission reductions.

Further, they pointed to the learning process of the EU ETS, with outstanding design faults likely to be addressed in Phase III, which starts in 2013. Reforms will harmonise state permits and offset quotas through central allocation, introduce permit auctioning (60%+) and include more industrial sectors. They emphasise that, although progress has been slow, boardroom mentalities are beginning to change as investment decisions are increasingly affected by carbon prices.