Dude, Where's My Cap-And-Trade Primer?

Congress is about to take up legislation to curb carbon emissions with a cap-and-trade program. To understand how the cap-and-trade system works, no textbook is required. You just have to be familar with the word dude — like surfer dude.

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STEVE INSKEEP, host:

A full-page advertisement in the Wall Street Journal caught our eye this week -wasn't for suits or computers - an ad pushing for a cap and trade program to address climate change. That term, cap and trade, has been around for a while. It's a way to limit carbon emissions. It's the method Congress is now considering. And again and again and again we hear people saying, no, I still don't get what it means. What is cap and trade?

So our Planet Money correspondent David Kestenbaum is here to help explain it.

Hi, David.

DAVID KESTENBAUM: Hey, dude.

INSKEEP: Dude. Okay, David, we thought it would be easier to talk this through if instead of limiting carbon emissions we talked about limiting something else. Any ideas what we could talk about instead?

KESTENBAUM: Yeah, we're going to talk about limiting the use of the word dude.

INSKEEP: Dude. Okay. All right. Like what are you talking about here?

KESTENBAUM: Well, here, I did some research.

(Soundbite of movie, "Dude, Where's My Car?")

Mr. ASHTON KUTCHER (Actor): (as Jesse) Dude, where's my car?

Mr. SEAN WILLIAM SCOTT: (as Chester) Where's your car, dude?

Mr. KUTCHER: (as Jesse) Dude, where's my car?

KESTENBAUM: This is a clip from the movie, "Dude, Where's My Car?"

(Soundbite of laughter)

(Soundbite of movie, "Dude, Where's My Car?")

Mr. SCOTT: (as Chester): Where's your car, dude?

Mr. KUTCHER: (as Jesse): Dude, where's my car?

Mr. SCOTT: (as Chester): Where's your car, dude?

Unidentified Man (Actor): (as character) Dude, where's your car?

Mr. KUTCHER: (as Jesse): Dude, it's not funny, dude. The car is gone.

Mr. SCOTT: (as Chester) Yeah. Shut up, dude.

INSKEEP: How would you do a cap-and-trade program on the word dude?

KESTENBAUM: Well, basically we pass a law saying you people who say the word dude, sorry, you are polluting. You are potentially creating a global catastrophe down the road, so now, starting now, if you want to say dude, you need a permit.

INSKEEP: Yeah.

KESTENBAUM: And here's the clever part. So if - let's say dude is said two billion times a year and we want to cut the dude emissions in half…

INSKEEP: All right.

KESTENBAUM: We just issue one billion permits.

INSKEEP: Half the number.

KESTENBAUM: Yeah.

INSKEEP: Okay, that's fine.

KESTENBAUM: That's a cap, so we've put a cap on the total emissions.

INSKEEP: And that's fine. You're going to make people say the word dude less, but what if I'm a surfer dude?

KESTENBAUM: Well, that's where the trade part of the cap-and-trade comes in. We're also going to create a marketplace, so instead of buying and selling corn futures or something like that, you can buy dude permits.

INSKEEP: Oh, I can go somebody who doesn't do the dude thing very often and buy their permits and then I have permission to say dude more often.

KESTENBAUM: Right.

INSKEEP: Okay. So that's how it works for the word dude. Let's go back to carbon, which is what we're actually considering having a cap-and-trade program on. How does it work if you're a business and you're polluting, you're emitting carbon which effects global warming?

KESTENBAUM: So if I own a coal power plant, say, and I don't have an easy way or a quick way to reduce my carbon emissions, I can go to that marketplace and I can buy enough carbon permits to cover my emissions. And the nice thing about this is that if it turns out there is a cheap way to reduce carbon emissions somewhere - say someone comes up with a new gadget to clean up coal plants or something - the people who own the coal plant will use that gadget because it will be cheaper than buying the permits. And in that case, the price of the permits actually drops because companies would need fewer of them, and we don't have to impose more of a cost on the economy than is necessary.

INSKEEP: So how do we decide who get a permit, dude?

KESTENBAUM: Yeah, that's where a lot of the fight is going to be, because let's take the dude case - you can imagine surfers saying, look dude, I can't do my job without saying dude. My surf school business is going to suffer. Hollywood is going to say people in movies say dude it all the time. We're going to have to buy dude permits. You're going to push up the price of going to movies for average Americans. So every industry in the real world that emits carbon is going to be arguing you have to go easy on us, you have to give us some of these permits for free.

INSKEEP: And it's fair to point out that some economists don't think that this cap-and-trade system is the best approach to limiting carbon.

KESTENBAUM: That's true. A lot of them favor a straight tax. So you say dude, it's going to cost you a buck or something like that.

INSKEEP: Meaning I can say it as often as I ever want to say dude, but (unintelligible) pay every time.

KESTENBAUM: Yeah, you just got to pay, and that will stop enough people from saying dude, 'cause they don't want to pay the money. So economists think that's a simpler and economically smarter way to go. But look, either way, we are talking about a tax. Either system to limit carbon is going to push the price of energy up. You're going to be paying more for gasoline. The government may try to ease the pain by giving some of the money it makes in taxes on permits back to people like you, but dealing with climate change, it is going to have some impact on the economy.

INSKEEP: So they're negotiating this climate change bill now. It's continuously changing. When we look at what it is now, though, is this program going to reduce carbon emissions enough that it would actually help the planet?

KESTENBAUM: I think it's fair to say that the scientific consensus and the economic consensus is that this is a start, but it's a very small start.

INSKEEP: NPR's David Kestenbaum is with our blog Planet Money. David, thanks.

KESTENBAUM: You're welcome, totally.

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