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Carbon Policy That Works

Avoiding the Pitfalls Of Kyoto Cap-and-Trade

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
July 23, 2007
Washington Post


Politicians have stopped denying climate change. Some even want to do something about it. But before reformers propose a grand plan that can’t work, they should consider the story of Tecnosol, a small company in Nicaragua.

Half of Nicaragua has no access to electricity. Women and children spend hours collecting firewood; the people suffer respiratory diseases from the wood smoke; they spend what little money they can spare on kerosene. Tecnosol replaces wood and kerosene with solar power; it is partway through an effort to install 25,000 solar units, cutting carbon dioxide emissions by 150,000 tons over the life of the equipment. But the villagers involved in Tecnosol’s project are being cheated. They are not getting paid for reducing emissions, even though solar conversions are good for the climate, good for health and good for poverty reduction.

This is more than a little ironic, since the cap-and-trade system developed under the Kyoto Protocol is supposed to promote development.

The system arose out of the tension between economists’ belief in the efficiency of trading — if it costs a producer $15 to cut carbon emissions by a ton, it makes sense for that producer to pay $8 to another producer who can achieve the same reduction for $5 — and moralists’ suspicion that trading lets rich polluters off the hook. The compromise was a “Clean Development Mechanism”: Trading would be allowed, but it was supposed to promote development.

The Kyoto system represents the culmination of a huge global diplomatic effort, and the United States was wrong to turn its back on it.

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