Can cap and trade work in the US?

Episode Summary

Executive Summary: The episode explains Washington State’s cap-and-trade program as an effort to apply economics to climate change by limiting emissions and letting companies trade permits. It follows Luke Martland as he helps launch the system, shows how auctions set carbon prices, and examines political backlash from higher gas prices. The story ends with Washington as a test case for whether market-based climate policy can survive in practice and inspire other states.

Main Topics: Economists’ market-based approach to climate change (Priority: 5/5): The episode frames climate change as a market failure: emitters don’t pay the full social cost of pollution. Economists prefer carbon taxes or cap-and-trade to force carbon prices to reflect damage and incentivize cleaner choices. Luke Martland’s move from legislative drafting to program implementation (Priority: 4/5): A lawyer who previously worked on climate legislation in Vermont joins Washington State to build a real cap-and-trade system, seeing it as a rare chance to create policy with immediate real-world impact. Designing Washington’s cap-and-invest system (Priority: 5/5): The state sets a declining emissions cap, distributes some allowances for free, sells others at auction, and uses a safety valve to prevent prices from rising too far. The system is intended to cut emissions while preserving market flexibility. Launching the first auctions and discovering real market prices (Priority: 5/5): Washington’s first auctions run successfully, and the clearing price comes in much higher than expected, signaling that polluters are willing to pay significant amounts for emissions allowances. Political and consumer backlash over higher gas prices (Priority: 4/5): The program raises fuel costs, provoking criticism that it functions like a tax and burdens consumers. Opponents use the price increases as evidence against the policy’s legitimacy and sustainability. Washington as a national test case for climate policy (Priority: 4/5): Because few U.S. states have economy-wide cap-and-trade, Washington’s success or failure could influence whether other states attempt similar programs. The episode presents the state as both a proof of concept and a warning signal.

Key Arguments: Climate change is an economic problem because polluters do not pay the full cost of emissions, so prices need to reflect environmental damage. Cap-and-trade is an economist-friendly solution because it sets an emissions ceiling while allowing companies to trade allowances efficiently. A real-world market needs outreach, administrative systems, and price safeguards; theory alone is not enough to make climate policy work. High allowance prices can successfully incentivize emissions reductions, but they also create political risk if costs are passed to consumers. Even a small state can matter politically and strategically if it demonstrates that ambitious carbon markets can be built and operated. Opponents argue the program is effectively a tax and may have limited global climate impact, since Washington represents only a tiny share of worldwide emissions.

Data Points: Washington 2023 emissions cap: 63 million tons - Initial limit on big polluters’ carbon emissions for 2023 under the cap-and-invest program Washington 2024 emissions cap: 58 million tons - The cap was set to decline the following year Washington 2025 emissions cap: 53 million tons - Further annual reduction in the allowed emissions cap Washington climate targets: Cut emissions almost in half by 2030; cut 95% by 2050 - Statewide long-term emissions-reduction goals under the law Program setup timeline: 18 months - Time the legislature gave to get the cap-and-trade system running First auction date: February 28, 2023 - Date Washington held its first carbon allowance auction First auction bids: More than 16 million bids - Total bids received for the first auction First auction allowances sold: 6 million allowances - Number of permits sold in the opening auction First auction clearing price: $48.50 per ton - Price companies paid for the right to emit one ton of carbon in the first auction Auction price later in 2023: $63 per ton - Price level reached by August 2023, raising political and market concerns State auction revenue in 2023: $1.8 billion - Money Washington collected from selling emissions allowances Estimated gas price impact: 20 to 60 cents per gallon - Economists’ estimate of how much the program added to gasoline prices Program coverage: Economy-wide, state-wide - Washington’s system covers major emitters across the state, including fuel distributors, utilities, and large institutions U.S. comparison: 2 states with economy-wide cap-and-trade - Washington and California are described as the only two states with such systems

Pivotal Quotes: "the idea is that for the most part, these big polluting companies and, you know, regular people driving their cars, they're doing damage to the climate that they do not pay for directly" — Keith Romer: Explaining the economic logic behind climate policy "We sold our house. We packed up all our things. And my husband, our at that point, six-month-year-old daughter and our bulldog piled into our 15-year-old Prius and drove cross-country." — Luke Martland: Describing the personal move to Washington for the cap-and-invest job "What Washington state did was incredible. And that showed other jurisdictions, other states, that this can be done. And this can be done well in a very tight period of time" — Luke Martland: Arguing that Washington can serve as a model for other states

Implications: Washington’s cap-and-invest program shows that carbon markets can be implemented at scale, but also that higher prices can trigger backlash. Its survival will shape whether other states view cap-and-trade as a viable climate tool.