Carbon cap and trade for developing countries could spur massive investment – ​​if it works

Ten years after a cap and trade system championed in part by John Kerry was brutally killed by one of his colleagues opposite, the former senator turned climate envoy once again presents politics as a solution to climate change.

As an idea, cap and trade is not bad! It works by asking governments to cap pollution levels and issue limited permits for polluters to find the best way to clean things up. Often the answer is better technology. Other times the answer is to buy permits from other companies that have been more successful in reducing their emissions. Over time, the number of permits decreases and pollution levels decrease.

As a policy, cap and trade has been widely applied, in many cases successfully. The United States used one in the 1980s to successfully reduce sulfur dioxide pollution that caused acid rain and again in the 2000s to reduce levels of nitrogen oxides. The EU currently uses one to reduce its carbon emissions, and there are a few regional systems in North America.

Kerry’s new proposal, as reported by the Financial Times, hopes to use cap and trade to encourage investment in developing countries’ energy sectors. It’s a policy that goes in the right direction, but with enough missing pieces that I wonder if it will turn out to be a failure or a diplomatic breakthrough, similar to the Paris Agreement. Here’s how it would work.