The Low-Carbon Diet

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The global economic crisis has battered the free market's reputation, but the market nevertheless remains a powerful tool both for allocating capital and for effecting social change. Nowhere is this truer than with the challenge of confronting and reversing climate change. Of all the market-based tools available for addressing this problem, the most potent are cap-and-trade systems for greenhouse gas emissions.

In their most basic form, cap-and-trade systems work by making it expensive to emit greenhouse gases. As a result, the owners of an emissions source are motivated to replace it with something less damaging to the environment. If they are unable to, the trading provisions allow them to purchase permits to continue emitting until they are ready to invest in new technology. Over time, as the amount of carbon allowed into the atmosphere is reduced, the price of a permit is expected to increase.

In existing cap-and-trade mechanisms, such as the European Union's Greenhouse Gas Emission Trading Scheme, governments cap the total amount of emissions allowed, and the amount of emissions permitted declines over time. Organizations such as utilities, factories, cement plants, municipalities, steel mills, and waste sites are given or sold permits that allow them to emit a certain portion of the relevant region's total greenhouse gases. If an organization emits less than its allotment, it can sell the unused permits to entities that plan on exceeding their limits. Under cap-and-trade systems, companies can trade permits with one another through brokers or in organized local or global markets...