The Story of Cap and Trade

December 3, 2009 9:02 AM

The Story of Cap and Trade

(previously by same person)

posted by symbollocks (50 comments total)

So where are these "Real Solutions?" As best I can tell, this story complains about loopholes undermining an effective solution, but doesn't present an alternative. Carbon taxes?
posted by pwnguin at 9:18 AM on December 3, 2009

Solution: Cap and Trade
posted by Sys Rq at 9:26 AM on December 3, 2009

Solution: Cap and Trade

If you believe the linked video, that's not a solution. The two "Devils" she complains about (the third one being "distraction", which will be a problem with any proposed solution that the commentator doesn't like) are free carbon credits and offset credits. Both of these are serious issues, but switching to "Cap" doesn't solve them. The real problem she identifies is that, no matter what the law, companies will find a way to cheat. She claims that is especially true in the third world. That, too, may be a serious problem, but it will be a problem with any legislated solution that doesn't involve the end of capitalism as we know it.

Also, though she doesn't identify it as a "Devil", she apparently hates economists. That's not really a problem, it's just a piece of needless bias that makes her come off as a little holier-than-thou and ill-informed and detracts from an otherwise important message.
posted by The Bellman at 9:38 AM on December 3, 2009

From a post I put up on my blog yesterday:

How cap-and-trade works for acid rain and smog. The success of sulfur dioxide market is an important piece of counterevidence to those (like me) who think that a cap-and-trade market won't work—but it's worth noting that a carbon market would be far larger in scope than the SO2 version, potentially impacting nearly every segment of the global economy. Speculative trading and even a financial bubble is much more likely to emerge in a global CO2 market than in a sulfur dioxide market conducted in a single country. An earlier Grist piece also problematizes the supposed success of sulfur trading:

Compare the success of the often-touted sulfur dioxide trading system the U.S., instituted in 1990, with the speed and quantity of reductions under rule-based systems during the same period. U.S. SO2 emissions dropped by 31% between 1990 and 2001. Over the same period of time, under old fashioned rule-based regulation, Germany reduced its emissions by 87%, Italy by 62%, and Western Europe as a whole by 57%.

A carbon tax remains the smarter choice.
posted by gerryblog at 9:38 AM on December 3, 2009 [1 favorite]

If you just Cap, you eliminate a class of easy investments in emission reduction because the polluter is under their cap. Trade gives the flexibility to let investment flow to the most effective strategies. As I understand it, the main reason European Cap and Trade failed to reduce emissions was the cap was set above the emission level of the time. Lowering the cap over time should solve that problem, assuming the politics that yielded high Phase I caps magically allow lower Phase II caps.

The only serious contender I've seen is a carbon tax, mainly for it's simplicity in administration, not because it stops corrupt 3rd world governments from cheating.
posted by pwnguin at 9:50 AM on December 3, 2009 [1 favorite]

She claims that is especially true in the third world. That, too, may be a serious problem, but it will be a problem with any legislated solution that doesn't involve the end of capitalism as we know it.

The end of capitalism as we know it does not equal the end of capitalism, full stop. Let's face it: Capitalism as we know it is less than ideal. What's wrong with "Capitalism as it should be"? Legislation is the only way to achieve that. Unfortunately, legislation is usually at the behest of corporate interest, so it's very, very unlikely to happen any time soon.

Also, though she doesn't identify it as a "Devil", she apparently hates economists.

Uh, except the ones she cites as sources, you mean?
posted by Sys Rq at 9:52 AM on December 3, 2009

Also, though she doesn't identify it as a "Devil", she apparently hates economists. That's not really a problem, it's just a piece of needless bias that makes her come off as a little holier-than-thou and ill-informed and detracts from an otherwise important message.

I don't recall her mentioning economists at all. Big business, yes. Maybe she named some of her stick figures "economists" early in the piece and I missed it, but none of the little animated guys actually represented economists as a class. Did I miss that?

It was an interesting presentation and made a lot of points I've agreed with since I first learned about the dangers of climate change, IN THE SEVENTIES. Christ. We've had 30+ years to grok this fully and we still refuse to do so in the name of "business" and "life as usual". Am I the only one who feels that real sacrifice and hardship is going to have to take place in order to find solutions to this problem in a timely manner?

Mainly, I was distracted by her continual use of parallel gestures! Jeez! It's, like, the first thing they tell you about public speaking -- no parallel gestures. They're not natural, they make you look like you are your own mirror, and they don't add to your points.
posted by hippybear at 9:54 AM on December 3, 2009 [1 favorite]

Ten bucks says that hideous green shirt she's wearing was bought at Wal-Mart.
posted by mark242 at 9:54 AM on December 3, 2009

see also: the Cap and Trade Song
posted by namewithoutwords at 9:54 AM on December 3, 2009 [1 favorite]

What the proponents of a carbon tax fail to consider is that a tax will always be less efficient than a market based solution like cap and trade. The burden of a carbon tax will fall disproportionately on the poor, whereas with cap and trade, the costs are borne by large corporate polluters, who cannot possibly pass the costs on to the consumer.

Furthermore, cap and trade allows us to harness the tremedous efficiencies of modern finance. In short order, the innovatitive power of the financial industry will produce a cap and trade system more effective than any hamfisted carbon tax, and without the excessive overhead of a bloated federal buraucracy.
posted by [citation needed] at 10:11 AM on December 3, 2009

The burden of a carbon tax will fall disproportionately on the poor, whereas with cap and trade, the costs are borne by large corporate polluters, who cannot possibly pass the costs on to the consumer.

Please say more about this so that I understand why the costs cannot be passed on. Thanks.
posted by not that girl at 10:13 AM on December 3, 2009 [2 favorites]

What the proponents of a carbon tax fail to consider is that a tax will always be less efficient than a market based solution like cap and trade.

Well, they are both "market based solutions" in some sense. Cap and trade proposals call for the creation of an additional market which in turn affects existing markets, whereas a carbon tax affects existing markets directly.

Like the commenter above I'm not seeing the difference between the two except that cap and trade proposals have a lot of obvious loopholes and require tons more bureaucracy (in order to enforce the limits) to boot.
posted by symbollocks at 10:25 AM on December 3, 2009

"What the proponents of a carbon tax fail to consider is that a tax will always be less efficient than a market based solution like cap and trade."
[citation needed]

Is this supposed to be a joke? No, really...this seems too perfect to be serious.
posted by Hypnotic Chick at 10:30 AM on December 3, 2009

I work for a client who focuses on energy education, so apologies for the link/info dump. Also, all my information is US-centric so apologies there as well.

EPRI (Electric Power Research Institute) models a solution that takes a "prism" or "full portfolio" approach to reaching the Waxman-Markey cap. They do reach that 350ppm number, and the answer is something that a lot of environmentalists don't like. Increasing nuclear to about 30% of our energy production pie. (depending on if carbon capture sequestration ever materializes it could be much higher)

A whole lot more about loopholes by the Breakthrough Institute. Most interestingly is the fact that the recent economic collapse has led to the largest decrease in carbon emissions known. Instating a cap at the projection of 2-3 years ago, when this bill was written, would make virtually no impact for years, even if the economy makes a dramatic and fast recovery, because we are already well below the cap. There are a lot of stupid loopholes and credits. One of note is a credit for having less parking spaces, which led big shopping centers to move trees in planters to block of 2/3s of their parking spaces for most of the year, and move the planters during the Christmas shopping rush. They then sold that "credit" for cash. Crap like this is what is bound to happen when legislators take business/green gimmick advice when they need scientists and engineers.

There are legitimate counter points. One of the biggest complaints from US business is that China and India won't get on board. Theres really no way around this, we really need population growth to level off. Historically this happens after an economy reaches industrialization. Waiting for the rest of the world to get there (if possible) may be too late.

The other would be better explained by a graph, but I hope you can follow my description of it. Carbon production and economic growth have a positive correlation. Economy grows, carbon emissions go up. If we are to imagine living under a constant carbon cap this means the economy will either have to stop growing or become more efficient/carbon frugal to a point approaching a very very small number. A healthy economy has 3-5% growth every year. This means 100 years from now (assuming no large busts or booms) you're trying to have the same level of carbon emissions for 300-500% more industry. Projected way out into the future this becomes unfeasible at our current technology. This means yes, conspicuous consumption at US levels is not tenable for the long term. We (or our great great grandkids) will have to make serious lifestyle changes, and likely the economy will be negatively impacted.

Saying "we'll figure it out in the future" reminds me way too much of [a] + [???] = $$$PROFIT! and then jumping up and down about profit and saving the planet.

But basically, my point is that there are solutions that don't require hinky pseudo-science, or reverting to subsistence farming. The problem is that Democrats (mostly Al Gore) don't want to touch Nuclear, and Republicans don't want to touch anything business with a 10 foot pole.

On preview, yeah I'm pretty much talking about the end of Capitalism as we know it. This can be something that evolves naturally and is eased into generations from now, not a giant collapsed economy. Personally I've got my fingers crossed for a Gene Rodenberry style United Federation of Planets economy with miracle things that make all the food and shelter that you could ever need. And friggen' sweet holodecks.
posted by fontophilic at 10:31 AM on December 3, 2009

Hypnotic Chick, that was my thought exactly.
posted by gerryblog at 10:31 AM on December 3, 2009

What the proponents of a carbon tax fail to consider is that a tax will always be less efficient than a market based solution like cap and trade. The burden of a carbon tax will fall disproportionately on the poor, whereas with cap and trade, the costs are borne by large corporate polluters, who cannot possibly pass the costs on to the consumer.

Why, exactly, can corporate polluters not pass the costs on to the consumers? What prevents them from raising prices to compensate?

Any disproportionate impact on the poor, from whatever the source, can be alleviated through lowering their income tax rate and increasing the earned income tax credit. I would expect any carbon tax to include such provisions right out of the gate.
posted by jedicus at 10:34 AM on December 3, 2009

Is this supposed to be a joke? No, really...this seems too perfect to be serious.

I assure you I am completely serious. I know more about this than you can possibly imagine.
posted by [citation needed] at 10:38 AM on December 3, 2009

haha? ...
posted by symbollocks at 10:39 AM on December 3, 2009

symbollocks: Like the commenter above I'm not seeing the difference between the two except that cap and trade proposals have a lot of obvious loopholes and require tons more bureaucracy (in order to enforce the limits) to boot.

I'm not sure where party leadership stands on it today, but a big difference between McCain's CCT and Obama's was that Obama wanted to put a tax on each sale of a credit (like those black disks being passed around in the video). This carbon credit tax would make purchasing permits more expensive than reductions/innovations, thus (hopefully) inspiring emitters to regulate themselves. Also, assuming (incorrectly) that monopolies aren't at work, if an emitter couldn't innovate and reduce it would pass on higher costs and fail when consumers choose for the cheaper/more innovative competitor (if it exists). That tax Obama collected would go into a magic bucket labeled "research" which would produce some public domain technology.
posted by fontophilic at 10:44 AM on December 3, 2009

"tremedous efficiencies of modern finance"?! Where the hell have you been for the last two years?
posted by JeffK at 10:48 AM on December 3, 2009

I assure you I am completely serious. I know more about this than you can possibly imagine.

And yet you don't manage to communicate any of that knowledge.
posted by bswinburn at 10:54 AM on December 3, 2009

cap and trade allows us to harness the tremedous efficiencies of modern finance. In short order, the innovatitive power of the financial industry will produce a cap and trade system more effective than any hamfisted carbon tax

LOL, like the mortgage industry? Yeah, that's worked out so well for us.
posted by wuwei at 10:56 AM on December 3, 2009

JeffK, bswinburn, and others: I think [citation needed] is a novelty/joke account, like IrrelevantTwainQuote on reddit. I sent a note to the mods about it. Figured there was no point in starting a MeTa post about it, yet.
posted by symbollocks at 10:57 AM on December 3, 2009

See, I like this video because it points out a lot of the things I've thought were wrong with Cap and Trade from the beginning. As stated above, the reductions of pollution in the 1990's for SO2 are a great example of a solution that worked, and worked better in other countries that had stricter enforcement.
Also, someone mentioned carbon sequestration. Do you have any idea how bad this idea is? I mean, seriously. Here's an example: Burping Lakes of Camaroon. for those who aren't going to read that, it's basically a lake over an old volcano, where the water trapped CO2 for a very long time, then in 1986, the pressure built up so much that said gas "burped" from the lake and killed, oh, everything that required oxygen to live for a few miles around the lake. CO2 is denser than normal air, so it lies low to the ground. You get a high enough concentration, and it sits there under the atmosphere (you know, the normal air we breathe), and kills you. So if we start sequestering CO2 underground, one of these days, it's going to break loose and kill everything near the fissure. And don't even think of saying "but we can fix that". No, we can't. Murphy's Law and all that. I'm convinced that sequestration is a massively bad idea.

Ok, on to the whole "markets are more efficient" thing. You know why a lot of people don't believe you? Recent history. The innovations you speak of? Yeah, Credit Default Swaps were an innovation. So was energy trading. So was bundled mortgages. I think a lot of people are rather fed up with these innovations.
Keep it simple, stupid. Stop trying to create new ways to get around the problems and just fix the problem. We put out too much CO2 with our industry. Solution? Figure out how to put out less CO2. Period. I don't care if it's not as efficient as using CO2. I don't care if it costs more. Figure out how to make that cost less.

Also, the reason why most people don't like capitolism as we know it now is because it's not actually capitolism. I really wish everyone who thinks the market can solve everything would actually go to the market instead of going to lawmakers to get bills sponsored that protects their industry from actual market forces. Like competition, and regulation, and the things that make a real market system work.
posted by daq at 11:01 AM on December 3, 2009

[citation needed]

And how, exactly, do you know what I can or can't possibly imagine? Anyhow, I would be much more compelled to agree with you if you'd support your position with some kind of evidence.
posted by Hypnotic Chick at 11:09 AM on December 3, 2009

Ok, wow. That was a failed attempt at irony. I'm sorry. I thought the last comment, though shibbolethy, would have been enough to clarify the tone of my first post, but I suppose there are enough cretins who actually still speak of the "efficiency" and "innovative power" of the modern financial industry in positive terms that there would be room for confusion. It wasn't my intention to troll the thread; my comment was written with the intention of it being absurd on its face. In any event, I would have hoped that my username would have tipped people off.

In all seriousness, I wouldn't be so opposed to cap and trade if the proposals didn't always wind up giving away permits to the biggest polluters, but it seems increasingly clear that you can't fight King Coal.
posted by [citation needed] at 11:18 AM on December 3, 2009

I thought this Cap'n Trade was a high seas sailboat freighter guy from back in the day who plied the high seas using the trade winds to get his trusty ship from port to port. Guess not.
posted by Nick Verstayne at 11:25 AM on December 3, 2009

you can't fight King Coal.

I hear he's quite merry, what with his pipe and fiddlers and whatnot.
posted by hippybear at 11:26 AM on December 3, 2009 [1 favorite]

Maybe this has been answered elsewhere, but my understanding is that China would either not be taxed or would be taxed much less than the US and Europe. So what would prevent US companies from 'outsourcing' carbon-intensive activities to China? Obviously there are things that must occur in the US but what would prevent the automotive companies who have manufacturing in the Southeast US from simply moving those plants 'offshore'?
posted by mattholomew at 11:28 AM on December 3, 2009

I like the idea of a carbon tax, especially as it allows a smaller group of countries to go ahead alone with reducing emissions by applying carbon taxes equally to imports. If China or whoever doesn't want to play, they can kiss western markets goodbye. I would like to actually see this in the EU, and would definitely vote for it.
posted by Sova at 11:29 AM on December 3, 2009

you can't fight King Coal.
His brother Nat, though? Great set of pipes on that guy.
posted by mattholomew at 11:34 AM on December 3, 2009

Isn't the "giveaway" objection easily solved (policy-wise, not necessarily politically) by auctioning pollution permits? It's not a new idea: "Barack Obama and Joe Biden’s cap-and-trade system will require all pollution credits to be auctioned. A 100 percent auction ensures that all large corporate polluters pay for every ton of emissions they release, rather than giving these emission rights away for free to coal and oil companies."[pdf]
posted by peeedro at 12:05 PM on December 3, 2009

daq: "Ok, on to the whole "markets are more efficient" thing. You know why a lot of people don't believe you? Recent history. The innovations you speak of? Yeah, Credit Default Swaps were an innovation. So was energy trading. So was bundled mortgages. I think a lot of people are rather fed up with these innovations. "

First, I have no idea whether markets are more efficient necessarily than other solutions. My own unscientific pet theory is that most people like the creation of efficient markets. WW2 prison camps apparently created efficient market clearing mechanisms, chiefly notice boards, in part owing to a communal dislike of middlemen and stories of obscene profits.

It seems apparent that the biggest failures you've cited were heavily engaged in over-the-counter trading and the innovation you haven't mentioned: dark pool trades. I believe Enron used OTC trades to bury fraudulent transactions, and OTC obscured the original source and magnitude of CDS contracts. The credit default swap, among other problems, was not kept in check by a public exchange, or regulated by the principles of insurable risk.

I guess I separate myself from the Libertards by replacing "markets are more efficient" with "exchanges are more efficient", at the expense of some freedom. The good news is the SEC seems interested in the subject.
posted by pwnguin at 12:11 PM on December 3, 2009

pwngion, I don't think I'm arguing against actual markets. My main problem is false markets created by legislation that are tilted in favor of the worst offenders of what the market is supposed to be solving. Cap and Trade is a prime example of a false market that is entirely fictional. We trade commodities on the market because there is a clear value in putting a product into the marketplace (or exchange, if you wish) that allows the buyer and seller to find the equitable price for their transactions. This Cap and Trade system is forcing someone to behave in a way that they don't want to. Polluters don't want to stop polluting, because it makes them money to do things in the status quo, and this market is trying to force them to alter that behavior. It's like saying "we are going to regulate you, but you get to choose which part of the regulation you want to follow". Wouldn't it make more sense to not have this middleman system and just say "hey, polluters, cut it out. Go install that new cleaner smokestack or we're going to fine you x milions of dollars per day". That's a proper whip to get things moving. As it stands, with Cap and Trade, we're saying "hey, polluters, go buy these pieces of paper that say you can continue polluting. Oh, and they're like 5¢ a piece, because we gave a bunch out for free and you also have a whole bunch of free ones too, so, you know, it's like, not as expensive as actually doing something about the mess you're making." That's not effective regulation of pollution. On top of that you are going to have to create a whole new regulatory agency just to manage the exchange of these carbon credits. That's complete bullshit. Any taxes collected in the exchange will mostly go to the overhead and paychecks of the regulators. It's just not a smart idea. It's creating more work that doesn't accomplish anything. Though, I suppose with all the Wall Street traders laid off with the collapse of the economy, I'm sure there will be plenty of people lining up to work for this new exchange, even if it's a fiat system on top of a fiat system. It just seems retarded.
posted by daq at 12:30 PM on December 3, 2009

It does seem to me, too, that any Cap & Trade system put into place is going to have to have some real iron jaws with nasty sharp pointy teeth in them for inspection and regulation of the emissions.

I mean, looking at the system as it is now, we can't even muster up enough inspectors or strong enough enforcement measures to stop people from doing the basic polluting which is already illegal, or to get them to clean up their messes that they've created. How on earth will we even be able to know when a business is violating the number of pollution units they've been issues or purchased on the market? If our policing and penalties are currently ineffective, I cannot envision a new set of restrictions will have any effect on the overall problem.

I say, corporate death penalty for any business which is found going over their cap-n-trade limits (if that's the system we're forced into). Either that, or nuke them from orbit. It's the only way to be sure.
posted by hippybear at 12:45 PM on December 3, 2009

Cap and trade for emissions seems like a stupid idea given that there's a much easier way to tax carbon — at the source.

The great majority of fossil fuels extracted are burned, so we could just apply the carbon tax early on, at extraction or import. Then we could offer tax credits to those industries which perform carbon capture or sequestration activities.

You don't need some giant enforcement apparatus, and the number of actual new taxpayers is quite limited (coal mining, gas/oil extraction, and petroleum importers).

It's simple, fair, and has little room for gerrymandering or favoritism—pretty much guaranteeing it'll never get implemented that way. Politically, a complex system that creates a giant new bureaucracy and has huge loopholes and opportunity for manipulation (if not outright regulatory capture) is far more desirable.

Actually, the simplest and probably the most effective way to curtail carbon emissions would be even closer to the source, and it would be global: just put some pressure on oil- and coal-producing countries to curtail production, or at least stop putting pressure on them to maintain/increase production. As production declined, prices would increase and carbon emissions would drop. No enforcement apparatus would be necessary. One twenty-minute phone call from the White House to the Saudi Royal Palace—or hell, probably just the lack of a phone call the next time OPEC threatens to decrease production—would have more effect than all the climate treaties and negotiations conducted so far.
posted by Kadin2048 at 1:03 PM on December 3, 2009

just put some pressure on oil- and coal-producing countries to curtail production, or at least stop putting pressure on them to maintain/increase production. As production declined, prices would increase and carbon emissions would drop. we would all welcome the new stone age, an utterly devastated world economy, and a huge body count.

Hell, Russia tweaked gas production and people in Europe froze to death. That was ONE country for just a few months!

Yes, we will have less carbon emissions if we are all dead. I'm hoping for a better solution.
posted by fontophilic at 1:37 PM on December 3, 2009 [1 favorite]

Also, someone mentioned carbon sequestration. Do you have any idea how bad this idea is? I mean, seriously. Here's an example: Burping Lakes of Camaroon. for those who aren't going to read that ... So if we start sequestering CO2 underground, one of these days, it's going to break loose and kill everything near the fissure. And don't even think of saying "but we can fix that". No, we can't. Murphy's Law and all that. I'm convinced that sequestration is a massively bad idea.

This is massively misinformed.

There is absolutely no parallel between CO2 from volcanic vents, and sequestering CO2 by injecting into deep reservoirs. For one thing, most CO2 sequestration projects pump CO2 into saline acquifers where pressure/temperature conditions are such that CO2 becomes part of the denser fluid phase and sinks to the bottom of the reservoir. So even in the absence of geological seals (like say, the ones that hold back overpressured natural gas reservoirs on geological time scales), the only place you need to be worried about dying from a sudden release of CO2 is if you happen to live near a volcanic source. As for CO2 injected into a deep reservoir on a sedimentary platform, your "one of these days" is hundreds of millions of years out.
posted by bumpkin at 1:40 PM on December 3, 2009

My job is designing and trying to pass cap-and-trade legislation, so I'm really interested in folks' perceptions and opinions here. Also I'm a proud member of this community and when MeFites have expertise, they should contribute. Let me try to do a quick point by point, as I am on the taxpayer dole:

Carbon tax: A tax only makes sense for carbon if you are confident that the level of tax you set will get the level of reductions you want. The certainty of a cap makes it a better choice for this reason. If insufficient reductions were being achieved, Congress would have to go back and increase the tax. Even if this were politically palatable, a tax would be as susceptible to loopholes, gaming, and exemption-seeking as any cap-and-trade system. Further, the SO2 reductions cited as a result of a tax were within a fairly small universe. A carbon tax would have to be economy-wide, and different industry sectors will respond differently to a carbon tax in terms of reductions. A cap and trade gives that needed flexibility. This is a good overview.

Carbon sequestration: We have safely stored CO2 geologically for decades, in depleted oil fields offshore and onshore. The challenge now is doing it at commercial power plant scale. CO2 stored underground would be at more than 800 meters, liquefied, and at pressure, unlike the situation in Cameroon, where it was gaseous under the surface of a lake. This is a good overview. Moreover, there are companies--such as Calera, backed by Vinod Khosla--who can turn CO2 from coal plant emissions into other materials, like cement, sand, or use it to grow algae. These are all at pilot or demonstration phases, but it is not speculative technology--it is here and needs to be brought to scale.

Auctioning allowances: The trouble with auctioning all emissions allowances is that it is regressive first--it would create higher energy prices, which hits poor folks hardest--and then you have to figure out a formula to pay people back to keep them whole. It also sets up a wealth transfer from high-carbon consumers (folks in coal states) to cleaner ones, as the high-carbon folks will be paying more. You can pay those folks back, reinvest in R&D and energy efficiency, which are all great ideas, but the problem is you have hundreds and hundreds of billions of dollars going through the Treasury that you hope will be spent the right way. I'm a Democrat, but I'm uncomfortable with the gov't handling that much cash here.

True, distributing allowances is also equivalent to cash, but those allowances can be banked, retired, traded, etc. Most of the allowances given away under current bills go to blunt the impact on energy prices to households--this is accomplished at the moment by giving allowances to utilities, who be required by law and their regulators to sell them for consumer benefit. Other delivery mechanisms are also considered.

An issue with that last paragraph is that if you blunt energy costs too much, then you can reduce the push for energy efficiency and electricity demand reduction, which is where we will get most of our early reductions.

And yes, you have to give allowances to energy-intensive, trade-exposed industries (like steel, glass, cement, and aluminum), because they make international commodities that are highly price sensitive, and energy is a big part of their production cost. If their costs go up too much relative to products from other countries (who may not be controlling carbon the same way or with the same stringency), then they move production overseas. Border adjustments for differential carbon costs are also contemplated and very popular in manufacturing states (which goes to mattholemew's question)

I would also argue that for politics and equity, allowances have to go to coal. Coal customers will be buying a lot of the allowances, and will see the most relative cost up front (even though their energy must be cheaper). Any legislation that pushes coal off a cliff will not pass.

A hybrid of mostly giving away allowances, and moving to an auction, is good policy, and politically feasible.

And just because allowances are free does not mean there is no incentive to clean up. If cleaning up a ton of carbon is cheaper than the market price for a ton of carbon, a company will clean up the carbon and sell the ton.


And, let's see, emissions monitoring?: All power plants currently monitor their CO2 and other emissions (either directly monitoring CO2 or using other emissions as a proxy), as do a lot of industrial facilities. Regulation will only be for those emitting 25,000 or more tons of CO2 equivalents a year, which is about 8,000 facilities in the country. EPA will soon implement a rule requiring all facilities who emit 25,000 or more tons of CO2e to inventory and report their emissions. So we'll know who emits what. And under cap-and-trade, not paying for your emissions will result in heavy financial penalties for each ton you are over.



I think this is one of the most important policies our country has ever tried to implement. I'm glad to answer questions, either here or on MeFi mail. I hope this is helpful.
posted by oneironaut at 1:47 PM on December 3, 2009 [5 favorites]

Oneironaut,
Thanks for your service. Your post, while informative, evaded the most crucial question:

Why should we trust the financial services industry to do the right thing here? Why should we trust that they won't just skim off fees while building another bubble?
posted by wuwei at 2:43 PM on December 3, 2009

wuwei: "Why should we trust that they won't just skim off fees while building another bubble?"

Am I missing something? The primary effect of the housing bubble was to build way too many houses. Wouldn't the primary effect of a carbon market bubble be "overbuilding" clean technology?
posted by pwnguin at 2:48 PM on December 3, 2009

No. The issue is building an economic house of cards-- when it collapses, it sucks down the entire economy.
posted by wuwei at 2:50 PM on December 3, 2009

One of the readers of my blog posted this negative response from Eric De Place at worldchanging.org, who really doesn't like this video.
posted by gerryblog at 4:47 PM on December 3, 2009

Wuwei--thank you. The answer to your question is that we can't trust. We have to regulate. And it is my opinion that right now, amid the smoking ruin or failed regulations, is the best time to learn lessons and build ones that work.

I work for a state whose constituents will have to buy and trade a lot of allowances and offsets. So I have two principles for elements of carbon market design. 1) Does this make it easier for facilities to do what they need to in order to comply? and 2) does this reduce carbon? If a measure does not meet both tests, then I reject it.

I envision a market in which all short term carbon trades must be disclosed or face heavy penalties, and all futures are cleared on a commodity exchange as frozen orange juice is now, with attendant regulations on position limits, deliverables, etc. And the only derivatives allowed are puts and calls. That meets my test.
posted by oneironaut at 10:03 PM on December 3, 2009

Oneironaut-

Your insight is appreciated. I'm curious about your reaction to Matt Taibbi's depiction of Goldman Sachs as well as cap & trade in his article Inside The Great American Bubble Machine.

If, as you say, any system is prone to loopholes and gaming, why do you think there is more certainty of reductions with cap-and-trade vs. carbon tax? Why wouldn't we expect Goldman Sach to maximize its trading profits by getting the politicians and bureaucrats under its influence to slip in legislation that authorizes additional questionable offsets and bogus carbon permits?

If we're doomed to chicanery either way, I'd rather just cut out the middle man...
posted by Esteemed Offendi at 10:03 PM on December 3, 2009 [1 favorite]

We are not doomed to anything. If we are doomed, then we should just sit at home holding our knees.

Matt Taibbi is an artful conspiracy theorist, and his throw-away paragraph at the end of that article is alarmist and borderline irresponsible.

The reason politicians like my boss won't slip in bogus offsets and permits is because their constituents will have too many investments riding on the validity of those tons. And because they have people like me advising them. I have met with exactly one Goldman Sachs person in my time here, and he was an investor in a power plant. There is widespread suspicion of financial services on the Hill, and a widespread recognition of the challenge we face. You should see the lobbyists from the Chicago Climate Exchange, peddling diluted wares and requests for special treatment that no one will buy, because they are not trusted. You feel a little bad for them. If these are not investment-grade, enforceable, verifiable, dependable assets, then no one will buy them. Industry will not be able to finance new clean tech. Farmers will not see a return on their biodigesters. No one is slipping in anything--there are too many eyes and the stakes are too high.

But if those of you who want climate action retreat and throw up your hands, we get nothing for a very long time. We have to make this work. A carbon tax is not on the table. We need you at the barricades. Because the other side doesn't care about whether it's auction or free allocation, cap or carbon tax. It's NO. No forever. An apocalyptic no. Blood in the streets. If you want climate action, if you want to change what the power generation for the next forty years will look like, the time is now. Or you can blame everything on the lizard people and the thirteen families and the three firms who really control history.
posted by oneironaut at 10:22 PM on December 3, 2009

Thanks for another insightful response oneironaut- and just to clarify, I didn't mean to imply you or others at the state level would be the ones pushing for bogus permits. ...But the notion that financial services firms influence federal policy is hardly conspiracy theory, no?

If CO2 cap-and-trade is enacted, do you envision the trading going through the Chicago Climate Exchange?
posted by Esteemed Offendi at 11:38 PM on December 3, 2009

oneironaut: With a cap and trade scheme you know what the limit you'll get is. Do you know what the cost of the cuts is going to be?

What's your position on international carbon trading? How will you know that the permits you are buying are not just given out?
posted by sien at 12:49 AM on December 4, 2009

Esteemed: I suppose CCX could be one of the regulated exchanges, but at that point its role would be different than it is now because EPA will be issuing the tons and deciding what is and is not an offset (this latter with the USDA).

Sien: You won't know the costs exactly, but current modeling by EPA, EIA, and others of Waxman-Markey and Kerry-Boxer show permit prices will start around $15/ton and increase from there. This is heavy, robust modeling andgives us a good sense. However, we are doing a lot of work on cost containment mechanisms to give much greater price certainty, at least for the first decade, without busting the cap. I think we'll succeed. Giving away allowances isna good way to keep costs down. Allowing wide trading and offsets also keeps costs down.

I do favor international carbon trading. The bigger the market, the cheaper the reductions for everyone. But the tons have to be as real, enforceable, and verifiable as ours. It doesn't matter whether or not they are given out for free in another country. A ton is a ton.

Thanks for your questions; I'm glad to he helpful.
posted by oneironaut at 4:31 AM on December 4, 2009

Democracy Now: Cap & Trade: A Critical Look At Carbon Trading
posted by Burhanistan at 9:30 AM on December 15, 2009