THE STORY OF CAP & TRADE

One of the major changes Barack brought to the White House was a firm stance on controlling climate change and reducing carbon emissions nationwide. Which is a good thing. Unfortunately, the proposed system of cap and trade has its critics, and with good reason. The notion that a market-based approach like the one on the table, is the solution to our ecological woes just doesn’t seem plausible. I’m not an expert on the subject, but Annie Leonard is. The Story of Cap & Trade is a simple and informative video that breaks down exactly what cap and trade means, offering other possible solutions to the looming problem of climate change.

  • Fourth World

    Annie Leonard’s brief explanation of what is wrong with cap and trade is excellent. Please do whatever you can to avoid giving Wall Street and the City of London even more opportunity to screw things up.

    In fact Annie makes a passing reference, near the end of her message, to carbon “fees.” What we need are carbon taxes. Any fuel that releases carbon should be taxed in any country that has carbon dioxide equivalent emissions of more than 2.5 tons per capita. This tax should be substantial. The actual level should be sent by a UN agency charged with bringing the planet back to a safe norm of 350 parts per million CO2 equivalent in the atmosphere. The tax should start out substantial with the promise that it will rise. Any nation over the per capita limit that does not impose the tax will be subject to trade tariffs. So all the crap that we import from China will get pretty expensive unless China imposes the tax. India still has some room.

    “Fiscal conservatives” will not want to see more taxes. Other taxes could be reduced. That is up to national governments to decide but they must collect carbon taxes on all carbon fuels produced for domestic consumption and all carbon fuels imported for domestic consumption.

    Clearly, in many countries the poor would be hurt by such provisions. Social service and welfare programs would need to be boosted. The carbon tax could be shared with these people, but not as a carbon subsidy. Indeed, they would receive additional credits if they could make small investments in energy saving technology. Slum lords, landlords and homeowners would all be given incentives to make housing more energy efficient. Gas at the pump would go up, a lot, good. The post office would not deliver junk mail to every house six times per week, good.

    In “less-developed” countries, efficient stoves for cooking would reduce the burning of wood and charcoal, while reducing smoke inhalation. Anticipating the impact of a carbon emissions limit, governments would invest in solar, wind and geothermal energy sources.

    It is really not that complicated. Governments need to take responsibility for real market mechanisms not turn over this critical responsibility to investment bankers.

  • niloc

    an avid supporter of this blog, im frankly surprised at this choice of media. this criticism of cap and trade is ultimately baseless. it plays on fears the american public has of economic catastrophe and paints cap and trade in the same light as the sub prime mortgage market (an extremely tenuous link at best). goldman sachs creating the sub-prime mortgage mess? no, mortgage brokers who offered nina (no income no assets) loans to people who should have known better than to take them. granted, the banks who created complex financial instruments are certainly at fault, but to place blame solely on these banks is unreasonable.

    this video also fails to offer any real viable solutions. cap and trade is not easy but it does something basic and necessary: it puts a price on polluting. we let price determine almost everything else in our society, and no one has found a system that allocates resources as efficiently (not necessarily equitably) as the free market

  • B. Williams

    Ken coming with an insightful post as always. Much appreciated.

    Without being an expert on this subject, my instinct is to say that allowing the free market to decide this doesn’t make sense, since unrestricted corporate interests got us into this mess (both financial and ecological). The idea of taxation, and subsequent redistribution of that money to programs aimed to combat climate change seems like the best solution.

    Whether you peg the blame for the sub-prime mortgage crisis on Goldman Sachs and investment bankers (which seems pretty logical given the evidence) or not, I think the problem is in the very concept of having these pollution credits be a commercially traded property. The fact that corporate interests are drawing up the plans virtually ensures loopholes for companies to cheat the system. If the “invisible hand” of the free market drove our country (and much of the world) into economic distress, why should we trust that it would have a positive effect on the environment? Instead of compromising for corporate interests, and keeping some blind faith in market capitalism why not introduce legislation that actually gets to the heart of the problem?

  • Fourth World

    The free market is a wonderful concept. Socialism is a wonderful concept. The details kill. The corporation was invented in America over two hundred years ago to provide services within a a community in one of the colonies. It was actually king a socialist thing with people pooling their resources to raise money to improve the town water system. The corporation, not an individual, owned the pipes and wells. However, the individuals – who had put their own money in – met when necessary to make decisions about the business.

    Forty years ago, investment banks in the United States were all partnerships or closely held corporations. The individuals who put their money in made the decisions. If your $40 million net worth, or half of it, is at stake when you underwrite a initial public offering of stock for Texas Instruments or National Semiconductor, you may deserve a $5 million bonus at year end.

    The problem today is that investment banks are not closely held corporations, much less partnerships. The individuals are not fundamentally at risk. If the downside on pumping up earnings with high risk adventures is that your have to retire on the $5 million you made last year while the upside is that you make $20 million this year there is a real problem. I studied the problem of moral hazard in business school 40 years ago. Yes, they had named it even then.

    The sub-prime mortgage crisis evolved from a structure I encountered also decades ago. An investment banker invited my employer to invest in the higher risk tranches of collateralize mortgage obligations. In this case, the investment banking firm proposed to buy up real estate loans secured by commercial properties and bundle them into a stream of loan payments that would be be paid out to classes of new lenders. Since we were known to be skillful analyzing risk, they came to us to invest in the subordinated trance. We would be the last ones paid if there was a problem, but we would get a very high interest rate. My analysis was that any smart commercial banker (banks that take deposits from individuals and companies for savings and checking accounts and who make loans to individuals and businesses) would love to sell off his mistakes to the investment bankers before it became obvious the loans were mistakes. It became clear to me that I personally would have to analyze every borrower in every package and that all the other lenders would be relying on me. I was going to be the only one with skin in the game. I went to the Manhattan office of one of the firms to have them show me the model they were using to substantiate the thesis that the distribution of risk across a wide portfolio of loans would mitigate the risks from any normal pattern of failures. A young MBA took me to his computer and showed me the model he had built. Whether it was a reasonable rationale for what they were proposing was not clear to me. What was clear was that the model was a Rube Goldberg presentation that no one would dare to put in front of senior management. The senior managers were not partners, putting their personal wealth at risk. They and the young MBA were all employees, apparently just think about the year end bonus which, if they played their cards right could be multiples of the annual salary.

    niloc, since the 1970’s US investment banks have been increasingly permitted to become entangled in commercial banking. Most money in the world is created through the operations of commercial banks pursuant to regulations of central banks. Commercial banks are therefore very important elements in open market economies. When investment banks failed to find smart investors for the subordinated tranches of their CMO’s they sold them to other banks in ways that played on common ownership links or the issuance of guarantees that did not count against the bank capitalization requirements enforced by central (government) banks. Once they had learned to make this high-faluttin’ ATM work to personal advantage, investment banks reached out to mortgage bankers (really brokers, not bankers at all) to channel loan product directly to the investment banks – by passing commercial banks that normally do home mortgages. These brokers found that the more careless their credit checking the more deals got done – no deal was ever rejected by an investment banker because investment bankers today are in the business of using other peoples money.

    Moral hazard affects all “professional” management teams in all widely held corporations. The laws against insider trading have the unfortunate effect of limiting the inquisitiveness of stockholders about the day to day running of a business. Because corporations are owned by so many small stockholders, they cannot communicate with each other except through the management groups they should be supervising. Corporate directors, elected by stockholders, are nominated almost exclusively by management. Mutual funds, standing between individual investors and their corporate investments simply sell the stock if they have serious concerns. However, most stock analysts and many credit (loan) analysts are young. This is their first recession. They slept through the lecture on moral hazard. Which class was that in anyway? Until you have been burned you don’t have the proper respect for fire.

    Relying on “the market” to solve the very serious, very global, problem of global warming is not a wise move when the market has demonstrated a lack of functionality. This type of “market” is not widely understood in market economies. Much less is it understood in “second world” command (socialist/communist) economies or “third world” largely non-industrialized economies. We need fourth world solutions that work everywhere in the world. In every nation two concepts are widely understood. Tax and tariff. If your country creates more than your per capita share of green house gas emissions, your government must impose a tax on all carbon based fuels. If you fail to do that my government will impose a tariff on anything you want to sell to us. The tax will be high, but the tariff will be worse. The carbon tax, if imposed will be the same in all places. This will allow the “law of comparative advantage” to prevail. In the places where substitutes for carbon based fuels are cheapest, those substitutes will be used. Greenland and Iceland will thrive on geothermal energy. Southern California and Spain will rock with solar. North Texas and Wyoming will wail with wind. No new coal-fired power plants will be built anywhere. But South Africa will tax and burn coal in its substantial industry if the tax still leaves coal the cheapest option for now. Those heavy taxes will support better schools, hospitals, roads and no doubt new research into solar power and its applications. Australia will face similar,but fair, problems.

    The United States, with all our potentialities intact, needs to step up and lead, beyond partisan politics.

  • Alex Hill

    I wouldn’t call Annie Leonard an expert.

    http://www.youtube.com/watch?v=TWjGZNDEH-A

  • B. Williams

    The guy in that video is a dummy. It’s the same old “big government and regulation are the enemy” and “socialism” garbage that Glenn Beck pushes daily. The idea that “climategate” somehow debunks the massive amounts of scientific evidence indicating that global warming is real is just stupid. If you’re starting from the assumption that it’s not a real problem, of course you’re gonna disagree with her argument. In the modern, interconnected global economy, it’s completely unrealistic to pretend that there aren’t situations where big government and regulation are necessary. In fact, it’s precisely because of unregulated business that many of those type of problems exist (i.e. pollution and global warming). So yeah, maybe Annie cited some bad statistics, but apart from that, there’s nothing in that video that really weakens her argument.

  • http://misterbarbarian.blogspot.com Alex Hill

    I think Lee Doren is correct in his critique of Annie’s proposal to sell carbon credits and then subsidize American citizens. If you make energy companies buy carbon credits, they’re going to pass the cost on to the consumer; meaning higher energy prices. Annie’s solution to higher costs is to take the money from the carbon sales and pay Americans in order to help defray the costs of the energy price increase. The problem with this is twofold:

    1. that it is unrealistic to expect the government to successfully and efficiently redistribute profits from the sales of carbon credits in a way that makes up for all the costs incurred by higher energy prices; especially without raising taxes or printing up more money.

    2. The selling of carbon credits is an incentive, not an ultimatum. It does not require the energy companies to stop polluting; theoretically under a carbon credit sales system, the amount of “carbon pollutants” are able to remain the same.

    I imagine the best way to move to cleaner energy is to make cleaner energy more competitive than “dirty energy”. Energy companies will most likely continue to buy carbon credits until clean energy starts to become a serious competitor. In all likelihood it’s competition that will drive the change to cleaner energy, not the sales of carbon credits.

    And on top of it all Annie wants to take money from carbon sales and give it back to third world countries. The problem is there is not enough of the pie to go around. It’s naive to think that with the money from the sales of carbon credits you can subsidize American citizens and give significant reparations to third world nations. Furthermore, who decides which countries get what funds, and to be used for what? And then who’s to say that money doesn’t get squandered by corrupt third world governments.

    Here are some more valid points that Lee Doren touches on:

    UN food programs flooding countries with enough food to destroy incentive for local farmers to continue growing.

    EPA regulation of carbon would grant EPA ability to regulate just about every facet of American life.

    Government backing ethanol, jacking up the price of corn, and Haitian food riots.

    I think your accusation that Lee Doren is a “dummy”, and that opposition to big government and socialism should be considered garbage is rather unfounded, especially considering your lack of any positive evidence/material to back up your assertions. Sure governmental solutions are the best answer to certain macroscopic problems (e.g dumping hazardous materials) but it is an overused (and often inefficient) solution; especially in regard to the federal government.

    Lastly I would like to address your claim that any attempt to debunk the theory of anthropogenic global warming through the use of evidence from Climategate in any way is supposedly stupid. Again you are making serious assertions without any serious supporting evidence. Lee Doren mentions that the proxy data for the global warming theory varies significantly from the instrumental data, thus indicating that there could be a serious flaw with proxy data accuracy. If it is true that there is a serious flaw with this data, then the proxy data should be thrown out and we are unable to assert exactly what the past temperatures were. Climategate apparently reveals an attempt by scientists to hide the parts of the proxy data that significantly varies from the instrumental data. If you are unfamiliar with proxy data, it is simply referring to ice core samples, tree ring samples, etc. vs instrumental data which is basically modern real time measurements.

    I look forward to your response.

  • B. Williams

    Alex

    You’re certainly correct that the fees incurred on energy companies would mean a rise in energy prices for the consumer. I am, however, in favor of energy being more expensive. Regardless of how much we bitch about gas prices, the fact is that we have so much pollution largely because we drive too much. If gas becomes more expensive, we Americans would have to restructure our lives around it. In many European countries, for instance, the price of gas is significantly higher, but as a result, public transportation services are much more efficient, affordable and useful.

    Of course, simply selling carbon credits is not the solution. Of course there would need to be a cap, which Annie in fact says should be the job of the EPA. The whole point of having an EPA is so that they can exercise some regulatory power over pollution. The notion that that would somehow allow to them to regulate “every facet of American life” is an unfounded load of bullshit. I mean, what “factual evidence” is that based on. Certainly not the legislation he’s referring to.The ultimatum comes in the form of “solid caps” and “strong laws”, rather than the lax ones proposed in the current Cap & Trade proposal.

    Which brings me to my next point. I still think Lee is a dummy, but let me elaborate a bit. His political theory is vastly oversimplified, and his thinking is a strain of the kind of unfounded fear-mongering that dominates right-wing politics these days.

    First off Lee states that our country became the richest in the world because we are a “free nation with limited government”. The fact is that our nation’s economy almost collapsed completely with the Great Depression. How did we escape this calamity? Big government solutions initiated by Roosevelt. Relief programs, taxation, public works programs, and reglulation of unscrupulous business practices. Without massive amounts of government aid and regulation, we simply would not have been able to dig our economy out of the depression.

    And let’s get something straight. The notion that the invisible hand of the free market will somehow lead to a less problematic solution than government regulation makes no sense. The nature of the free market benefits corporate giants. Sure we are the richest nation, but our prosperity comes at the price of destruction, poverty and exploitation of other countries. Not to mention, the wealth, however great it may be, is distributed more inequitably here than almost anywhere in the world. Free market dogma posits greed and self-interest as the tendency to which we should entrust global economy, rather than the desire for justice or equality. That’s the inherent problem.

    Wealth redistribution and socialism always seem to come into the conversation. But the fact that those words automatically generate a negative response doesn’t really make sense. For one, it’s not the Cold War anymore; contrary to what Glenn Beck might tell you about “Comrade Obama”, we’re not fighting a war of containment right now. The fact is that our economic policies arenot entirely capitalist or socialist. They’re somewhere in between which is why we have social services, support programs, good hospitals, and taxes. Put the market completely in charge of those things and god knows what happens.

    The fact is our government would benefit from adopting more traditionally “socialist” traditions. For one, we could use higher corporate and property taxes, particularly on the wealthiest of the wealthy. The corporate powers that control resources continue to hoard wealth, living in absurd luxury while our infrastructure suffers. To my mind, it’s time that wealth gets reinvested into education, healthcare reform, or as Annie suggested, perhaps even foreign aid, given the ill-gotten benefits our country has reaped from poorer nations.

    As far as Global Warming is concerned, like I said, I’m not the expert. But a three minute video that cites two charts doesn’t convince me that more than 90% of the scientific community is wrong.

  • Alex Hill

    For convenience I’ve posted my rebuttal here:

    http://misterbarbarian.blogspot.com/2010/01/continuation-of-discussion-on-cap-and.html

    Because the windows to write on W&B are so small, I wrote in Word. It pasted better to Blogspot than here. If you guys can figure out a way to move it here still intact then be my guest.

    I am fine if you post your response here or there, or both; or not at all, although that wouldn’t be any fun.

    Happy debating.