The Facts of Cap and Trade

Bill Hewitt on 21/05/2010 in 18:57

BH: Okay, Patrick, maybe I should’ve elucidated what I found wanting in your piece.

PB: Sorry Bill, I only just noticed this reply to my post when looking at this: cleantechnica.com/2010/06/08/five-good-things-cap-and-trade-has-done-for-you/

BH: … The world community certainly didn’t meet in Copenhagen for the first time on climate change.

PB: No one said it was the first time; the word used in the ‘script was ‘finally’ because nothing else had worked up to that point to address the crisis. By all accounts, the Copenhagen summit was an opportunity to change history, given how badly Kyoto’s emissions trading mandate was performing, and that Obama had replaced Bush.

BH: There have been many years of hard work, thought, and some serious commitments made by tens of thousands of people and scores of countries, international governmental organizations and nongovernmental organizations.

PB: Maybe so. Still, the underlying premise of Kyoto – that you can address a market problem (emissions externalities) with a (financial) market solution – is generally questionable; and in the case of emissions trading absolutely in doubt; and in 2009 (just months after world stock markets had lost half their value from 9 months earlier) absolutely absurd. And all that work put in since Kyoto in 1997 has achieved a ‘failed’ carbon trading pilot scheme in Europe (as you put it) and a rise in emissions – time to throw in the towel and try something new, perhaps?

BH: Enron – which no longer exists – and Goldman Sachs have precisely nothing to do with formulating cap-and-trade. Sure, it’s a rhetorical device by you, but it fails badly.

PB: You’re not reading closely enough. Here’s the ‘rhetorical device’, plus the footnotes in the ‘script at storyofcapandtrade.org: “Okay, meet the guys at the heart of this so-called solution. They include the guys from Enron (1) who designed energy trading, and the Wall Street financiers like Goldman Sachs(2) who gave us the subprime mortgage crisis.”
(1) In an August 2009 report about Enron alumni in the carbon markets, the Financial Times offers not a hint of irony: “‘People who were attracted to Enron and its desire to open new and cutting-edge businesses are also likely to be attracted to the carbon market,’ says Lynda Clemmons, who started the emissions trading desk at Enron in 1994. It also innovated in the electricity, gas and coal markets, to which carbon is highly correlated, which makes former Enron traders particularly suited to trading carbon. ‘They bring a breadth of cross-product coverage that makes them natural candidates to look at emissions,’ according to one industry insider.” Uh oh, when the Financial Times offers me ‘natural candidates’ from Houston to help solve the climate crisis, I say, No Thank You! I’m sad because we had all hoped that the retrenched staff from Enron’s bankruptcy would go get a job, not continue playing those speculative financial games that caused so damage to Californians like me, and to the firms’ shareholders. (See Markus Sommerauer, ‘A strange alliance making profits for a cleaner cause’, Financial Times, August 5, 2009; and Solomon Lawrence, ‘Enron’s Other Secret’, Financial Post, May 30, 2009, network.nationalpost.com/np/blogs/fpcomment/archive/2009/05/30/lawrence-solomon-enron-s-other-secret.aspx.)
(2) For Goldman’s role in the subprime scandal, see Matt Taibbi, ‘The Great American bubble machine’, Rolling Stone, July 9-23, 2009. Taibbi warns, “Instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an ‘environmental plan,’ called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market cashino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance… This is a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion. Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they’re the profit-making slice of that paradigm, and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than [Mark] Patterson, now Treasury chief of staff.)… The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes… Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market? ‘Oh, it’ll dwarf it,’ says a former staffer on the House energy committee. Well, you might say, who cares? If cap-and-trade succeeds, won’t we all be saved from the catastrophe of global warming? Maybe — but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax-collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it’s even collected… The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees — while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.”

BH: … I’m glad that you think the cap part of cap-and-trade is great. It’s the key. But to reject the trade part is, well, just ignorant. Yes, there will be brokers. That’s what markets do. Markets, whether you like it or not, are extremely efficient.

PB: Sorry for being ignorant, but after an education at Swarthmore, Wharton and Johns Hopkins specializing in development finance plus two years as a Federal Reserve employee plus many years policy and academic experience in South Africa, I’d say that financial markets, whether you like it or not, can be extremely inefficient. For example, they can overprice stock values by 100%, as we learned from September 2008-April 2009. Did you notice? How do you explain such wild swings in terms of ‘efficiency’, Bill?

BH: They – and Adam Smith would’ve told you this in 1776 – of course need to exist under some framework of regulation. Markets are not inherently bad as you would have us believe.

PB: No, financial markets for trade in pollution are indeed inherently bad. They allow mispricing of the asset in a systematic way, profiteering by polluters, scamming and gaming, power plays, more adverse consequences for climate victims in the Third World (from where I write), and distortions of democratic process. They distract us from the command-and-control emissions cuts we need to solve this planet-threatening crisis.

BH: In any event, “our planet’s future is not in the hands of ‘these guys.’” Governments regulate the carbon markets. Should it be careful regulation? You bet.

PB: Should there have been careful regulation of Wall Street and of deep offshore drilling in the Gulf of Mexico? ‘You bet.’ Has there been? No. Is this because state officials, an incredibly greedy, irresponsible private sector and huckster journalists led us all astray? ‘You bet.’ Is this still a problem with the fossil fuel industries, financiers, and the emissions markets? Do governments like Hungary reissue emissions permits illegally? Do billions of euros worth of VAT avoidance schemes distort the market? Has the EU EMS crashed five times? Did the UN have to ban its main CDM implementation agency for incompetence and fraud? Do proponents of cap and trade conveniently ignore these problems? You bet. You bet. You bet. You bet. You bet. And no, to your credit, you at least admit that the EU EMS has been a ‘failure’, kudos to you for honesty. But surely this record adds up as something to walk away from now, doesn’t it?

BH: By the way, what economists involved with the enormously successful US acid rain cap-and-trade program are saying it’ll never work for greenhouse gases?!

PB: Enormously successful? Not as much as the kind of command and control that the EU imposed or as the earlier SO2 tax. As for our pro-cap-‘n-trade economists who don’t believe it will work for CO2, you are not up to reading ‘scripts, eh. Ok, since you haven’t bothered checking footnotes in The Story of Cap and Trade script, here it is, from Jon Hilsenrath, ‘Cap-and-trade’s unlikely critics: Its creators – economists behind original concept question the system’s large-scale usefulness, and recommend emissions taxes instead,’ Wall Street Journal, August 13, 2009: “When he was a graduate student in the 1960s working to reduce pollutants, Thomas Crocker devised a cap-and-trade system similar to one being considered in Congress… ‘I’m skeptical that cap-and-trade is the most effective way to go about regulating carbon,’ says Mr. Crocker, 73 years old, a retired economist in Centennial, Wyo. He says he prefers an outright tax on emissions because it would be easier to enforce and provide needed flexibility to deal with the problem… The other, John Dales, who died in 2007, was also a skeptic of using the idea to tame global warning. ‘It isn’t a cure-all for everything,’ Mr. Dales said in an interview in 2001. ‘There are lots of situations that don’t apply.’ Mr. Crocker sees two modern-day problems in using a cap-and-trade system to address the global greenhouse-gas issue. The first is that carbon emissions are a global problem with myriad sources. Cap-and-trade, he says, is better suited for discrete, local pollution problems. ‘It is not clear to me how you would enforce a permit system internationally,’ he says. ‘There are no institutions right now that have that power.’ The other problem, Mr. Crocker says, is that quantifying the economic damage of climate change — from floods to failing crops — is fraught with uncertainty. One estimate puts it at anywhere between 5% and 20% of global gross domestic product. Without knowing how costly climate change is, nobody knows how tight a grip to put on emissions… Mr. Crocker says cap-and-trade is better suited for problems where the damages are clear — like acid rain in the 1990s — and a hard limit is needed quickly.”

BH: What is the “growing movement” of cap-and-trade opponents to which you refer? The main opposition lies in the Republican Party that thinks that NO is the only policy alternative to anything the Obama Administration supports.

PB: Ah, but who cares, it’s easier for you to ignore the existence of the progressive/green movement against cap and trade, e.g. the Durban Group for Climate Justice, Friends of the Earth International, and the Climate Justice Now! network (which had half the civil society space in the Bella Centre at Copenhagen). Try, for instance, durbanclimatejustice.org/

BH: Free permits! A giveaway? Not really. But you are guilty of a fairly extraordinary misapprehension by any number of groups that supposedly are thinking hard about these issues. This analysis of Waxman-Markey by Robert Stavins pretty well debunks that myth. (He has a similar analysis recently of Kerry-Lieberman.) Bottom line? “Thus, the totals become 79.9% for consumers and public purposes versus 20.1% for private industry, or approximately 80% versus 20% — the opposite of the ‘80% free allowance corporate give-away’ featured in many press and blogosphere accounts. Moreover, because some of the allocations to private industry are – for better or for worse – conditional on recipients undertaking specific costly investments, such as investments in carbon capture and storage, part of the 20% free allocation to private industry should not be viewed as a windfall.” The first phase of the European Trading System was, admittedly, a failure, because the EU allowed the utilities to double dip. They did get a cushion and were allowed to jack up prices. The ETS folks have since learned their lesson.

PB: Yes, really. Here’s my colleague Maggie Zhou’s reply to the argument that “those giveaways require utilities to pass on the savings to their customers in a way decoupled from energy consumption. The reason why this is false is b/c many (most?) states have undergone utilities deregulation, and the oversight on utilities is minimal to non-existent. And there are the revolving doors/fox guarding the hen house… so free allowances will most likely not result in consumer protection, or will not result in incentives for energy conservation.”

BH: The UNFCCC, from day one, stipulated the principle that the developed nations would bear most of the costs and burden of clean up and would transfer money and expertise to developing nations. That’s precisely what the Clean Development Mechanism does. The CDM will have dispersed nearly 1.8 billion bankable Certified Emission Reduction credits to the developing world by the end of 2012, not to mention having been the major stimulus, in many cases, for over two thousand quite effective and sustainable projects.

PB: Sure, CDMs are fine for the World Bank, Third World polluting corporations and Northern polluters which buy the credits – but not for the climate nor for a great many victims of damaging mega-dams (themselves major methane emitters), damaging methane-electricity landfill projects (as we have in Durban), damaging tree-planting land grabs and other damaging ‘false solutions’. Additionality is a notorious problem. A good example of ongoing CDM scamming is the attempt by the South African power producer Eskom to get additional World Bank funding on top of the $3.75 billion loan they just received which is mainly to build the world’s fourth-largest power plant. As a result of these kinds of destructive projects, the CDM – called ‘privatization of the air’ in my part of the world – is opposed by the most advanced climate justice advocates in the Third World; and indeed market mechanisms were even fought against in the 2009 climate debt debate by most African countries’ delegates.

BH: Cap-and-trade would “supposedly” reduce pollution? Environmental regulators have been actually reducing pollution for decades throughout the world. You presume that environmental regulation doesn’t work.

PB: Nonsense, we presume that command-and-control regulation will work, and that, as you admit with the EU prototype, market-based mechanisms won’t address this crisis properly. That’s precisely why we oppose cap and trade: it slows down implementation of an effective regulatory process.

BH: That’s just ludicrous. Oh, and why would it be hard to verify the reductions?

PB: Because the CDM and numerous other trading mechanisms make extremely complicated calculations about net reductions. They are so difficult to verify that the UN’s main verification agency was fired last September for gaming the system.

BH: Particularly for point sources, it’s relatively easy – we’ve been doing this for a long time for many pollutants.

PB: Read Crocker and Dales in the WSJ article above for the critique.

BH: A “global cap,” for your information, is not being discussed. Again, it’s been long since stipulated that developed nations will set limits and developing nations will aim for targets. (It’s more complex than that, but that should do for these purposes.)

PB: A ‘cap’ in colloquial terms would be the transition from targets to verifiable commitments. The world desperately needs a cap to bring us down to at least 350 ppm (and probably further). By pushing cap and trade, we’ll never get there.

BH: Pre-emption of the EPA rule on GHG reduction by the legislation only happens in the event of a federal cap-and-trade law beyond what exists under the Clean Air Act. This pre-emption is not welcomed by many analysts and it’s certainly not welcomed by the states where some programs might also be pre-empted. I came from a conference today – of a number of extremely smart, committed and effective environmentalists including – shock – key government officials firmly convinced by the evidence of cap-and-trade’s success and its necessity for a federal and eventually international carbon market. Using an auction system for permits, the Regional Greenhouse Gas Initiative (RGGI) has been generating revenue – nearly $600 million to date – for clean energy programs for the participating states and is on track to reduce power sector carbon emissions by 10% by 2018. See this from the Center for American Progress. (You know how deeply in collusion they are with Enron and Goldman Sachs.)

PB: CAP has its share of cap and trade hucksters, one of whom lost a serious debate on the issue to Daphne Wysham of the Institute for Policy Studies on The Real News last December: therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=4631

BH: Oh, and one of the world’s leading proponents of cap-and-trade, Barack Obama,

PB: You’re not paying attention, are you. He’s been told by his handlers not to mention cap and trade, and to leave it out of his speeches. So Obama went from this kind of rhetoric – “What I’ve said is that we would put a cap and trade system in place that is as aggressive, if not more aggressive, than anybody else’s out there” (January 17 2008, San Francisco Chronicle) – to zero. As the New York Times reported (March 26 2010), ‘The concept is in wide disrepute… Obama dropped all mention of cap and trade from his current budget.”

BH: … also has called for the worldwide elimination of fossil fuel subsidies. One does not preclude the other.

PB: He breaks every promise he makes, doesn’t he. That’s why the US representative to the World Bank sad idly by when the World Bank made the $3.75 billion loan to Eskom for the world’s fourth-largest power plant in March. Obama will end up giving very passive support to Kerry-Lieberman cap and trade, in a dishonest way, and won’t do much about fossil fuel subsidies. Wall Street and Big Oil are too important for his re-election fundraising drive, we all know. If you are pinning your hopes on Obummer, there will only be tears.

BH: So, it appears that a price on carbon does exactly what your video calls for: pushes energy use away from high-carbon intensity.

PB: As the EU EMS experience shows, relying on carbon markets to set a high price and to lower carbon-intensity simply doesn’t work. The price crashes regularly, and has settled at such a low level as to make renewable investments uneconomic.

BH: Capping GHG is so not business as usual.

PB: Of course it’s not. It’s what we want, a genuine reversal of energy, transport, production and all other GHG emissions. And emissions trading sets back this cause because it lets too many gimmicks break the cap. What we need is the kind of action from EPA that they belatedly did in West Virginia in March: banned mountaintop removal using existing legislation. Since GHGs have finally been labeled pollutants, all it takes for Lisa Jackson is to get into higher gear and impose 2% annual emissions requirements for the 10,000 leading CO2 emitters, which is not such heavy lifting. We know she can do this, as the EPA threatens to implement its anti-GHG policy in 2013 (hmmm, what a curious date to start). I suspect that given the gridlock on Capitol Hill (thank goodness), more protest of the sort West Virginia activists have done over the past year is the only way to get the lazy slobs at EPA off their butts.

BH: This assertion is really a childish, knee-jerk, actually pretty reactionary perspective. If you don’t create a stick with the cap and the flexibility – the carrot in the trade – you make the move toward low-GHG economies more difficult, compounding the problem.

PB: If you give the kinds of carrots you are proposing to the likes of the Enron and Goldman gamblers who remain at the heart of the scheme, you get what Europe shows: multiple scams, market volatility and too low a price to be of any use.

BH: Here are four reasons why cap-and-trade is the best approach. This is from one of the most respected environmental scientists in the world, Michael Oppenheimer, and a pretty world-class economist, the guy from the video, Nat Keohane.

PB: Please don’t talk about world-class economists or I’ll bring out the likes of Larry Summers, for whom the ‘economic logic behind dumping a load of toxic waste in the lowest-wage countries is impeccable’ (World Bank memo, 1991) and deregulating Glass-Steagall and other financial sector protections was just as impeccable. For every Oppenheimer of yours, we can find a James Hansen.

BH: Sorry, but that’s the real story. Your video gets nearly everything wrong. You certainly may mean well, but facts count in this sort of conversation. That’s why your video is misguided.

PB: You’re welcome to try your critique again, but this time, have a look at the footnotes to the ‘script and tell us where the facts are wrong.
PS, by the way, if you think it is possible to argue that SO2 or CFC cap and trade is the reason for saving the Ozone hole, read this by Laurie Williams and Allan Zabel of the EPA: “What Worked for Acid Rain Won’t Work for Climate Change… Concurrent with inception of the acid rain program, the U.S. devised and deployed a different economic mechanism to meet Montreal Protocol commitments to reduce ozone depleting chlorofluorocarbon emissions. As then-EPA Administrator Reilly noted in his statement to the Montreal Protocol parties in June 1990: ‘On January 1, 1990, a new tax went into effect in the United States, a tax on the manufacture of CFCs. This tax exceeds in value the cost of CFCs themselves and it will rise steeply in the years ahead. . . . This added cost of CFCs sends a powerful signal: it says bring on the substitutes fast! And it reduces the comparative economic advantage CFCs would otherwise enjoy over the more expensive substitutes. This tax on CFCs has already caused the United States to reach the agreed targets for reduction earlier than required.’ As experience with the CFC tax demonstrates, a fee or tax that raises the price of a source of pollution above that of cleaner substitutes can help in quickly meeting reduction targets. Indeed, the CFC tax helped cut U.S. emissions of CFCs by 37% in one year, from 1989 to 1990. If high enough carbon fees are applied to fossil fuels to make fossil fuels more costly than clean energy within a known time frame, the entire economy will be stimulated by the rush to develop the most cost-effective substitutes. The CFC-tax example, rather than the Acid Rain cap-and-trade example, is the appropriate model for the problem we face with climate change… Fast and effective action by the U.S. can kick-start the global transition. Massive investment in clean energy can help revive our economy and restore our global leadership. We urge all Americans to speak out in favor of a carbon fee or tax approach. If we don’t, then less efficient and equitable approaches such as cap-and-trade will carry the day. For a more detailed look at these issues, see our paper, Keeping Your Eyes on the Wrong Ball.”