CNBC's Carbon Council Backs Cap and Trade

With President Barack Obama now committed to attending the final days of the Cop15 climate meeting in Copenhagen, the debate over how the world should reduce emissions remains as controversial as ever.

A key component of the deal that is expected to be agreed upon in principle by the end of next week is the formation of a Cap and Trade system. Aimed at capping the level of global carbon emissions the Cap and Trade system will create a market for carbon emissions that will allow the buyer to pay a charge for polluting and the seller to be rewarded for having reduced emissions by more than was needed.

Business leaders from across the world who make up the CNBC Carbon Council have outlined their views on the new system.

While there is division among the politicians, scientists and voters on Cap and Trade and its implications, the business leaders we have spoken to back the system as a cheap, cost-effective way of cutting emissions and giving them the clarity needed to invest.

To help focus the discussion, we talk to a Cap and Trade advocate and skeptic who favors a carbon tax instead.

The Believer

Patrick Birley is the CEO of European Climate Exchange, which is the world leader in trading of carbon emissions in Europe and the world.

Europe has the most advanced Cap and Trade system on the planet and Birley said that the market, while not perfect, is evolving all the time and overcoming initial teething problems.

Each time a problem has been identified it has been fixed in a pragmatic way that the rest of the world can learn from, Birley said.

Crucially, he said he believes the system is working and has incentives for European businesses to invest in the opportunity that Cap and Trade represents.

"European businesses are re-tooling their power production towards low-carbon technology and this will serve them well in the long-term," he said. "As other countries impose similar caps, European industries will be able to export their early knowledge and skills to the rest of the world."

The Skeptic

Bjørn Lomborg, the author of ‘The Skeptical Environmentalist’ said Cap and Trade is a good idea, in theory.

In practice, the system has been and will continue to be a spectacular failure that will simply favor those companies individual governments choose to offer free permits too, Lomborg said.

The big winners from Cap and Trade have been the European energy companies at the expense of consumers, he added.

"They got all the permits for free and ended up charging the customers," he said. "They got between 10 and 20 billion euros in windfall profits per year. The Waxman-Markey is pretty much the same thing. It's a catalogue of inefficiency, that’ll create pork bellies, horse trading. It will give away permits to the industry. It’s a poor way to help climate change"

(Waxman-Markey is a US bill designed to combat climate change.)

Instead, Lomborg said he believes a carbon tax would be a far better option.

"A reasonable carbon tax would be around $7 per tonne of CO2," he said. "But it’s no fix to fight climate change. Other approaches would be to invest in R&D, in clean tech and geo-engineering. This technology will be more effective. One dollar of this technology will avoid 2000 dollars in climate damage."

"Trying to lower CO2 emissions will cost $1 for every 2 cents of climate damage avoided," he said. "Geo-engineering and other clean technologies are 500 to 5000 times better."

The Carbon Council's View

Chad Holiday, the Chairman of Dupont (US)

“DuPont supports a system that puts a cap on greenhouse gas emissions and allows the market to decide where best to make reductions, rather than a command and control approach.

Putting a cap on emissions will ensure the environmental outcome, and trading helps deliver that outcome at the lowest cost to the economy as a whole. On the other hand, a carbon tax assures the price of emissions, but can not guarantee that target emissions reductions will occur without constantly revising the tax as the economy responds. Furthermore, in today's economic environment, enacting a carbon tax would be politically very difficult.”

Lars G. Josefsson, the CEO of Vattenfall (Sweden)

"The first priority of climate policy is to address the emissions from large industrial plants and power plants. Policy must convince these industries that it will cost too much in the long term to run a plant that emits CO2. This means either a Cap and Trade system or a carbon tax; I believe that Cap and Trade is more trustworthy in the eyes of business.

Taxes are more likely to be repealed or lowered for political reasons, while carbon markets create a broader range of stakeholders who have an interest in preserving the policy. The European system has received some criticism, but this is misguided. Its effectiveness cannot easily be measured over 3-4 years. The key is that expectations change long-term decision-making. This is already happening. The priority now has to be making the carbon price as global as possible.”

Dr Zhengrong Shi, CEO and Chairman of Suntech Power (China)