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Will Cap-and-Trade Incite Protectionism?

CAMBRIDGE ­– There is a serious danger that the international adoption of cap-and-trade legislation to limit carbon-dioxide emissions will trigger a new round of protectionist measures. While aimed at reducing long-term environmental damage, cap-and-trade policies could produce significant harmful economic effects in the near term that would continue into the future.

Scientific evidence appears to indicate that the accumulation of CO2 in the atmosphere from the burning of fossil fuels (primarily coal, oil, and natural gas) – mainly in electricity production, transportation, and various industrial processes – contributes to gradual global warming, with long-term adverse effects on living conditions around the world. It is with this in mind that representatives of more than 150 countries are scheduled to meet in Copenhagen in December to discuss ways to reduce CO2 emissions.

A common suggestion is to impose a tax on all CO2 emissions, which would be levied on companies that emit CO2 in production, or that sell products like gasoline that cause CO2 emissions when used. Such a tax would cause electricity companies and industrial firms to adopt techniques that reduce their CO2 emissions, as long as the cost of doing so is less than the tax that they would otherwise have to pay.

The higher cost of production incurred to reduce emissions – and of any emissions tax still due – would, of course, be included in the price charged to consumers. Consumers would respond to the tax-induced increase in the cost of the emissions-intensive products by reducing their consumption of those goods and services in favor of goods and services that create smaller amounts of CO2 emissions.