The Environmental Spectator
The Problem With Cap and Trade
The bankers and traders of Wall Street and London should not be its main beneficiaries.
The pending climate legislation that has spent so many months languishing in Congress was stripped of its initial momentum by the deep worldwide recession, the administration’s failure in Copenhagen to get commitments from China sufficient to allay concerns about continued job migration from the U.S., the scandal over some of the science, and the struggle over health care reform. But the principal reasons for the demise — the huge tax and trading boon to the banking industry in Wall Street and London — deserve some further scrutiny.
The sponsors of so-called cap and trade legislation claimed that it was based on the hugely successful acid rain cap and trade program put into effect by the 1990 Clean Air Act Amendments (CAAA). As will be discussed more fully below, this characterization is highly inaccurate, because the Waxman-Markey bill and Senate counterparts created a $3 trillion tax and commodities market where the CAAA had done nothing of the sort. This feature of the climate legislation hurt its electoral chances by allowing Republicans accurately to portray the bills as a huge tax while scaring off at least half a dozen centrist Democratic senators worried about having to contain another Wall Street derivatives meltdown because of the proposed pollutive materials commodities market.
As criticism of the tax intensified over the course of the last year, climate bill sponsors responded by promising the return of the allowance revenues to taxpayers and by erecting a whole set of new financial protections parallel to the current financial reform effort. This triggered understandable skepticism — since if the money were truly to be returned to its source there would be no point in collecting it in the first place. Moreover, there would also be no need for financial protections, unless there were something else going on. It’s the “something else” that is really at the heart of the problem and that deserves further examination.
That “something else” has to do with the only true short-term beneficiaries of the whole exercise — namely the bankers and traders of London and Wall Street who were ready to collect huge profits from trading carbon under the proposed legislation. The junior senator from New York put it best in an October 21, 2009, op-ed in the Wall Street Journal, where she said that as a result of the legislation, the “financial market [was] poised to deliver significant growth.” She explained that the “carbon permits [under the climate bills] could quickly become the world’s largest commodities market, growing to as much as $3 trillion by 2020,” and that “New York’s financial talent, expertise and institutions are uniquely suited” to run this new market.
Acknowledging the need to address the regulatory aspects of a new set of derivative trading, Sen. Kirsten Gillibrand observed that “Congress should integrate carbon trading into comprehensive financial reform,” but she cautioned that the derivatives contracts should be allowed to be customized and not forced to be standardized and thus made fully transparent in any new regulatory structure. Finally, she noted that it was essential to the “ultimate benefit for New York that the market for carbon-emission permits is internationally integrated.”
London was equally enthusiastic. Carbon could become “one of the fastest-growing markets ever, with volumes comparable to credit derivatives inside of a decade,” said the head of emissions trading at Merrill Lynch’s offices in London. According to another promotional article, London already “trades more carbon than any other city in the world,” thanks to the European Emissions Trading System (ETS) set up by the EU after the Kyoto Treaty. As a result of carbon trading requirements, said the article, “carbon emissions are bound to become the world’s biggest market….this is a bull market and great to invest in.”
The Times of London further quoted a leading London trader as saying that “Europe will be the centre of the global market as a result of taking the lead….London is the leading centre and will remain so for years to come. The preparation has taken place here, and other financial centres are not so advanced….”
It is entirely true that climate leadership originated in Europe, especially in the UK, where much of the scandal over possibly manipulated science has also been centered. Given this background, it is hard to believe that ordinary greed did not trigger the rush to create an unnecessary windfall for traders. But the resulting backlash against bankers who stood to profit from cap and trade could have been easily avoided by actually following the model the measure’s advocates said they were copying.
As noted, the White House and the sponsors of the Waxman-Markey legislation passed last year prominently asserted that their proposals were based on the successful acid rain cap and trade program by the CAAA in 1990. But the acid rain reduction and other successes based on it did not involve the impossibly complicated $1 trillion auction/tax/allowance reallocation scheme that Waxman-Markey features, as a result of the political logrolling necessary to secure the close 219-212 House vote.
To the contrary, all previous cap and trade programs have been based on an annual reduction of allowances initially allocated on the basis of an average of previous emissions that were well documented — a simple formula that has been totally abandoned by Waxman-Markey.
Moreover, no one ever accused the acid rain program (or any of the others) of giving away “free” allowances, despite the lack of an initial auction for the permits. There was in fact nothing “free” about any of it, because utilities had to start reducing their acid rain emissions from day one, ultimately having to spend billions ($6 billion in the case of Duke Energy alone) to meet the requirements. But without a huge float of auctioned allowances, there were no financial machinations, and with no revenues collected, no political fights over revenue distribution that have so poisoned the current climate debate.
The acid rain program was itself based in part on a similarly successful — and auction — free-trading system established in 1982 to accelerate the phase-out of lead in gasoline. The next pro-posal after the 1990 CAAA was RECLAIM, which was established in 1994 by California and which successfully initiated nitrogen oxide and sulfur oxide trading within the state — again without an auction.
Subsequently, the EPA established successful trading programs for nitrogen oxide in the eastern U.S. and later, during the George W. Bush administration, for sulfur oxide in the Clean Air Interstate Rule (CAIR) intended to achieve a further 70 percent reduction beyond the original 50 percent cut in the 1990 CAAA. There were no auctions for these successful programs. (The U.S. Court of Appeals for the District of Columbia Circuit subsequently questioned the legality of the CAIR trading system, which is now being revised.)
Supporters of the carbon dioxide auction have frequently cited the European ETS as the real reason auctions are necessary. The first phase of the ETS did not use an auction and over-allocated the allowances, producing utility windfalls and carbon dioxide prices so low as to be meaningless. But the proximate reason for the problem was that there was no reliable baseline emissions data, as we have had for decades in the case of utilities here in the U.S.
The European Commission has corrected this mistake for the second (and successful) phase that is now in effect — but without an auction, it must be quickly noted. There are proposals to launch a 60 percent auction for the third phase, but that auction would probably be discretionary with the member states, which may not impose them for many of the same reasons militating against an auction in the U.S.
Letter to the Editor View all comments (36) | Leave a comment
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zeye| 6.25.10 @ 6:56AM
You have to be kidding me. The problem with cap and trade are the beneficiaries?
Wake up! Cap and trade is, at best, premised upon poor science, at worst, the greatest hoax ever perpetrated upon the world. Cap and trade and its various permutations will severely retard worldwide economic growth and rob the world's improvised of a better living standard.
Junk science foisted upon the public by politicians and government funded research 'scientists' must end. The same NASA fool who trumpeted an end to the world as we know it because of global cooling gets a free pass to trumpet our end by global warming. If it was not so absurd and dangerous, it would gut splitting hilarious.
c. j. acworth| 6.25.10 @ 6:00PM
Took the words right outta my mouth, zeye. The reason capn'tax is in trouble is because more and more people are seeing it for the scam it always was. More nukes! Drill, baby drill!
darcy| 6.26.10 @ 5:12PM
"Cap and trade and its various permutations will severely retard worldwide economic growth and rob the world's improvised of a better living standard."
You mean that's why O put taxpayer's on the hook for hundreds of billions of dollars of aid in The Global Poverty Act, signed into law in February this year? It's meant to mitigate the effects of the blow to the economies of the world caused by the excessive greed of the rich and not-yet-so famous?
Sounds like a scheme to loot the taxpayer yet again so that special interests can walk away with power and the boodle. The oligarchs get richer and the taxpayers get poorer. What's not to like?
Some day the taxpayer is going to wake up and realize he's being taken for a stooge; I hope it happens sooner rather than later.
Liberty 4x4| 6.28.10 @ 12:01AM
I beg to disagree with you Darcy. I doubt most taxpayers will ever wake up. They will continue to be stooges. Most have no idea what is going on and crap and tax doesn't even compute in their daily lives.
Many don't even have or know how to budget their own personal finances, therefore, they have no idea what their own economic mess is much less the country's.
Why do you think we are even discussing crap and tax - the biggest and most destructive financial scam in America today; taxpayer ignorance, apathy, and catatonic stupor of all that is pertinent to a free constitutional republic?
When I see progressivism begin to be eradicated in our schools, colleges, legal systems, churches, political environment, economics, businesses, scientific community, and virtually every segment of American culture, then will I have hope that the American tax payer is actively and wisely engaged and awakened.
Right now I only see a temporary knee-jerk reaction from taxpayers, strictly for angry self-centered interest in the up coming congressional elections which actually solves nothing. It just sets the country up for another extreme left leaning pendulum swing.
I wish I had faith and hope in your optimism, but, reality bites and bites hard and painfully for those who choose to ignore it.
darcy| 6.28.10 @ 12:47AM
You are a defeatist. I recommend to you the speeches of Winston Churchill during the Blitzkrieg.
Buck up. And stir your friends to action. It will do you some good.
Liberty 4x4| 6.28.10 @ 7:17PM
I am not a defeatist just a realist. I am a great admirer of Winston Churchill, but, take a deep look at Churchill's England today, that is, Englandstan as they so aptly call it today.
I have talked to many people about our country's situation, of which I am fairly deeply versed in, and, most just have the attitude; what can I do about it. When I tell them they say its too complicated for a minimal return, or, that I am over exaggerating the situation, or, they just aren't interested, or, they are far too busy to be bothered.
The progressive movement in this country is far more insidious that what Churchill faced. He had a well defined enemy that was not infiltrated into the English culture as is progressivism in America today.
This is what people do not understand and refuse to confront because progressivism is so thoroughly entrenched into our culture it is extremely hard to even see who the enemy is. They have, for over 5 decades, slowly built a parallel society by mirroring then co-opting our constitutional republic with political correctness, verbal virtuosity, and dependency mentality.
Progressivism is so insidiously woven into the fabric of our society that it seems too complex and overwhelming to undo, especially when few actually know or care about undoing this constricting python. Most people just view the curious progressive python as an exotic pet to admire and play with until it strategically decides to strangle an apathetic, non-attentive society to death.
I am afraid that today one heroic person will not be able to battle this enemy without the help of highly knowledgeable, fiercely committed, and totally engaged patriots who know what they are fighting for and up against.
My sense and experience is that, eventually, the python will have its meal, though, this is truly not my desire.
darcy| 6.29.10 @ 6:19PM
It is a shame that the members of your circle are so completely apathetic and/or otherwise defeatist. It is not so in my circle.
Moreover, I fight. I learn -- I make it my job to be informed -- I read extensively. I take the message to my precinct residents, as their precinct committeeman. You say you are a realist. Would that you were an optimist and a fighter, the Paul Revere of your group.
Stick it in their faces and tell them the truth: Wake up or lose everything. And that's no exaggeration.
Bill Hussein O'Stalin| 6.25.10 @ 8:13AM
Cap and trade is only an emissions reduction program in the sense that is it's goal. You can buy your way of it and the government benefits. Therefore it is a farce.
JimH| 6.25.10 @ 8:21AM
As I understand it these are essentially licenses to create CO2 on an industrial scale. Now once this is in place and the gummint and it's friends are making piles of money on it, how quickly do you think any new non-carbon generating technology will show up? Particularly as they must really know that whether global warming is true or not CO2 is not the couse. Or am I just cynical?
Tim*| 6.25.10 @ 8:44AM
Cap & Trade is a moneymakin' scam.
BP & Enron created the scam in the mid 90's and now Obama is attemptin' to sneaky backdoor reward his donor buddies at BP by tryin' to get Cap &Trade; passed in The United States.
The Tea Party Rebellion Escalates
131 days to November 2nd.
Jeff Lee| 6.25.10 @ 9:47AM
I must be confused here. I thought the politicians worked for the banks.
Louis Jenkins| 6.25.10 @ 9:53AM
Al Gore couldn't have his way with the masseur until he agreed to give up some of his profits in the cap and trade business. And as proof, the masseur kept her dress for insurance purposes. I don't know much, but a scam is a scam. He didn't invent the internet, but he has invented knee cap and trade.
Tim*| 6.25.10 @ 9:53AM
Apparently , a number of politicians work for those who grease them with big campaign donations.
Petronius| 6.25.10 @ 10:08AM
Cap and Confiscate is what we should call it. The purpose of this travesty is to drive up the cost of living and substantially reduce disposable income.
F***ing despots!!!
Jenny| 6.25.10 @ 10:45AM
Cap-n-Trade is one more stop on the road to serfdom.
It's a scandal how far politicians will go to scratch the banks of rich traders and bankers and vice versa. Gotta keep that home in the Hamptons and the yacht. Gotta keep the servants employed.
Cap-n-Trade is merely a way to let the rich get richer and screw the poor and middle class. That is its goal. It has nothing to do with saving the planet. We all found out that is a farce anyway, invented by people who never get out of New York City and Washington D.C.
Pete| 6.25.10 @ 11:11AM
Just another end around. Regulate the crap out of the financial industry, then run cap n trade through them. Money laundering 101.
Ken (Old Texican)| 6.25.10 @ 11:26AM
C. Boyden
That was perhaps the most scholarly defense of an idiotic idea, (carbon trading), I have ever read.
Thank you for your splendidly articulate...stupidity.
I think I will go eat some red beans now, to contribute to global greening through methane.
Mel Torme| 6.25.10 @ 12:15PM
Ah, C. Boyden Gray, another useful idiot heard from. Do you realize what a sucker you are, Mr. Gray? The socialists have got you all worried about the finances, beneficiaries, and contracts involved with this Cap and Trade scam, instead of some common sense thoughts about "oh, why are we fighting this imaginary Boogety man (aka Boogie man) to begin with?"
I guess you don't fancy yourself any type of scientist, so at least you didn't spout BS about it. As an engineer, I know perfectly well that a model of the entire world climate, including natural effects is not close to ready for prime time. Give it 20 years and a lot of research. If we don't know the exact reasons for the ice ages, and we don't know when the next large volcano will explode, I don't see the point in trying (unsuccessfully, I might add) to precisely model only some of the physical processes, except as an exercise in science (as I stated, not ready for prime time).
Mr. Gray, you are obviously too stupid to look at the big picture, and that is a shame. TAS has some 1/2-way decent writers, and they could have easily found a good article to take the place of your crap. You may have a good grasp of high finance, but don't you see that you are going right down the path that the lefties want you to follow? Now, for you, it's just an argument of what type of scam to run at the expense of what's left of the American economy.
Before your next article, Mr. Gray, I would advise you to concentrate on basic chemistry rather than the high finance, in order that you see the big picture. Put your skills as a useful idiot to the socialists on the shelf, and get a freakin' life!
John Navratil| 6.25.10 @ 7:47PM
Could you explain better what you disagreement with Mr. Gray is an idiot? I'm confused. He calls C&T a redistribution scheme rather then imposing a cost on the economic externalities and rejects the C&T proposal. You seem to suggest that the climate models are not ready for "prime time". How do the two relate?
John Navratil| 6.25.10 @ 7:52PM
Apologies for the first sentence. It should have read...
Could you explain better what your disagreement with Mr. Gray is?
Still not the greatest example of the grammarian's art.
Mel Torme| 6.25.10 @ 9:14PM
Yeah, I can explain better what my disagreement with Mr. Gray is. See, John, he is letting the socialists win the major battle, then retreating most of the way back to home base to fight it out over HOW Cap and Trade should be run, rather than WHETHER there is any reason in the world to fight against the global warming* boogety-man.
The whole climate change deal is a hoax, John, and most people have an inkling of this, even though in the past they have been used to trusting the scientific types. (I don't put the blame, BTW, all on scientists, as most of them just do their research and publish. However, journalists can't do science or math, so they will take some worst-case scenario from a paper that is really just about a work, whether observation or modeling, in progress, not the future of the world. Lately, I would say that some of the scientists have gotten totally corrupted, as they like the flow of big money as much as the next guy. Also, lately the reporters and politicians have gotten in the habit of just making things up, including making random quotes from hiking magazines become data used to formulate socialist public policy - see Copenhagen, 2010)
I see no reason to just grant the whole lefty-socialist crowd that their whole made-up scenario is true, just to get into a financial (libertarian vs. socialist) argument about in which way the taxpayers and energy consumers will be screwed. You've retreated most of the way by that point.
This is why I see Mr. C. Boyden Gray as a useful idiot. He has let the left roll over him with the paver machine, and is now content to get into a discussion with them over whether his squished body should be moved to the crown of the road or over by the gutter, before the lane dividers are painted.
He disgusts me.
* Or, in case this is outdated by the time it gets posted, "global cooling", "climate change", "global climate steadiness", or whatever the hell the latest story is.
Mel Torme| 6.25.10 @ 9:23PM
I could add a lot more, John, or point to some other blogs that concentrate on this matter solely. I am just amazed that this climate BS has gotten this far, that's all. This writer doesn't help by being as much of a dupe as he is.
I appreciate your writing back (I think that your sentence is fine - I don't know what adverb must be put next to "explain", but it sounds correct to me ;-)
It's a shame the writer is too busy or snotty to respond. Some of the standard Spectator writers do, and I am always appreciative, even on the occasion that their responses are more garbage.
John Navratil| 6.26.10 @ 11:58AM
I understand your point. Like you, having lived through the impending ice age, I consider the "climate change" theory total garbage. I take your point that arguing about C&T is very akin to you colourful description of moving the body before it gets painted.
But, purely academically, his argument that C&T replaces a market response to regulation with a command economy is not without merit. And if C&T is to pass (which seems a good, but not sure, bet) it merits consideration.
Thanks for writing.
Mel Torme| 6.26.10 @ 12:08PM
John, I am totally in agreement with your last paragraph (which means I don't argue with the logic in Mr. Gray's article, just with the point of arguing it rather than the original question - "what kind of BS is global warming?")
Basically, I think the command economy via C+T is the socialist's goal in this matter. Most of the hard-cores know don't believe in the science either (which explains why they don't mind buying houses that are at sea level).
We should fight their war closer to their home base, not ours. There is no reason to give up on the point of the obviously flawed science. Most thinking Americans are coming around on this.
Mel Torme| 6.26.10 @ 12:10PM
Thanks for writing back, too, BTW. Have a good weekend, John.
Ken (Old Texican)| 6.25.10 @ 2:20PM
Mel,
good job!
How did you like my new slogan?
toot .....contribute to global greening through methane.
Mel Torme| 6.25.10 @ 3:30PM
As long as it's pure methane, Ken, I've got no problem. You're probably fine with the beans, but give me some Kim-chi or Sichuan food, and I cannot guarantee I would be able to identify all of the various chemical compounds. Some of them may even be real honest-to-goodness pollutants, the kind of stuff I wouldn't feel good seeing come out of my old Chevy's tailpipe, much less mine.
;-)
Joe D| 6.25.10 @ 4:49PM
C. Boyden Gray, if you think the problem with the cap and trade is how they are going trade and monitor it you are way off base. And your opion has not merrit.
We in the real world don't believe in junk science and the government running our lives or taking more of our money.
jeffm| 6.26.10 @ 10:37AM
Mr. Gray makes some good points about why cap and trade has so much support from the wealthy, I don't see any need to criticize him for not simultaneosly attacking the "science".
The only way cap & trade can reduce emissions is by creating an artificial shortage. It is said that "prices are set at the margins"- what someone will pay for that last CO2 permit greatly influences the price of all. "Little people" wanting to heat their homes or manufacture will be competing against the likes of AL Gore. Al's ability to pay so that he can fly to the next CO2 conference will mean that "little people" will do without.
Also, to the extent that CO2 trading becomes international, manufacturers with lower costs will be able to outbid America's few remaining producers. And countries which have not sued Nuclear power out of existence will have an increased advantage over America.
Mel Torme| 6.26.10 @ 12:14PM
"... I don't see any need to criticize him for not simultaneosly attacking the "science". "
I just explained why up above. Read what I wrote. Do you want to just let these socialists roll over you with their "world has a fever" crap? I mean, Mr. Gray can write what he wants, but he ought to look at the big picture and so should you.
I am pro-Nuke, and if you really believe in this crap, you (not you, jeffm, but anyone) ought to be pushing for nuclear power out the ying/yang. I wonder why you don't see that?
Anyone?
Anyone?
Bueller?
Environmental Guy | 6.27.10 @ 7:00PM
The problem with Cap and Trade is that is does not really have the environment at heart. It is all about making money. I wonder when they are going to start charging us to exhale?
Liberty 4x4| 6.28.10 @ 12:15AM
Shortly after it's passed, so, start practicing holding your breath as long as you can now.
Bennet Cecil| 6.28.10 @ 6:14PM
Cap and Trade will destroy the manufacturing and mining sectors of the US economy. It will worsen our balance of trade and will kill prosperity in the US. Voters need to realize that China, India and others will be happy to have the manufacturing profits that the US forfeits. Agriculture, manufacturing, mining all need energy. Heating and air conditioning will become less affordable as prices go up. You can be certain that politicians will be comfortable, but you might not. You might also be without a decent job. Energy is the source of prosperity. Oil, natural gas, coal and nuclear energy are the sources of a modern economy. Overtax them and destroy prosperity.