Cap and Trade
Under the proposed C&T systems, the government would establish an economy wide cap on the amount of carbon that may be emitted. The government would then issue carbon allowances that represent the right to emit a certain amount of carbon each year. The total amount of allowances issued cannot exceed the cap and the amounts of available allowances are reduced over time. Companies that need to increase their carbon emissions beyond the allowances they hold must purchase additional allowances in the marketplace. The transfer of allowances is referred to as a trade, and these transfers often occur on a carbon exchange similar to the commodities markets.
The primary disadvantage of the C&T proposal is its impact upon the price of diesel fuel. The amount of allowances that petroleum refineries would receive is far less than the amount of carbon that results from the combustion of the transportation fuels they refine. As such, refineries would have to purchase a significant amount of allowances, which will be passed on to trucking companies in the form of a significant increase in the price of diesel fuel. As the amount of available allowances is reduced over time, the price of diesel fuel will continue to escalate.
The price of oil already is volatile. Adding a fluctuating carbon price to the cost of refining diesel will likely increase the volatility of diesel prices, making it increasingly difficult to predict and recover fuel costs from shippers.