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Why cap and trade could backfire

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A similar situation could occur under a cap-and-trade regime. Under cap-and-trade rules, the government places an artificial cap on the amount of carbon each regulated facility may emit. Facilities producing more carbon than they are allowed are required to purchase additional credits to make up the difference. The opportunity to purchase these credits creates a market where none previously existed.

As in the example of the fined parents, the purchase of the right to emit greenhouse gases would likely reduce any stigma associated with doing so. Emission levels, consequently, could rise.

This phenomenon is already seen on an individual level. Al Gore says the risk of catastrophic global warming is so great that Americans should act immediately to reduce greenhouse-gas emissions. Yet his home uses 20 times more energy than the average American home, according to the Tennessee Center for Policy Research. That's OK, the former vice president assures us, because he purchases offsets to ensure that he lives a carbon-neutral lifestyle.

His message – albeit unintentional – is simple: Produce carbon to your heart's content; just pay a carbon broker to "neutralize" your carbon footprint and your guilt.

If Mr. Gore could not purchase offsets, would he feel more pressure to reduce his energy use? The likely answer is "yes."

Columnist Charles Krauthammer explains in Time magazine that "purchasing carbon credits is an incentive to burn even more fossil fuels, since now it is done under the illusion that it's really cost free to the atmosphere."

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