Cap and Trade--the new indulgences

As someone who was raised a Lutheran, I find the whole idea of approaching the carbon emissions debate with the concept of cap and trade almost unbearably funny AND offensive.  Let me explain.

Cap and trade is an idea that comes mostly from the mind of a former University of Chicago economist by the name of Ronald H. Coase whose 1960 paper titled "The Problem of Social Cost" eventually would win him the 1991 Riksbank (Nobel) Prize in economics.  In a nutshell, cap and trade is an idea that replaces strict regulation of emissions with a flexible scheme that would set an overall total for carbon output but would allow the "wisdom of the markets" to set the strategy for achieving those goals.

For example, say you were a power company with a dozen coal-fired generators spewing out thousands of tons of carbon dioxide every year.  Congress passes a law that says folks like you must reduce your carbon pollution by 20%.  Under cap and trade you would have options for meeting such a goal.  You could shut down 20% of your generating capacity which is not really possible because you have customers for the electricity you generate.  You could replace some of your coal-fired plants with some method that doesn't spew so much carbon into the air.  But that is difficult and expensive--however, it would get you carbon credits for your virtuous behavior which you could then sell to those companies who do not upgrade their generating capacity.  Or you could do nothing to your plants but you would buy carbon credits from someone who has upgraded.  So under cap and trade, the cap is the setting of carbon limits while the trade is the "free-market" method of meeting those limits.

So cap and trade is a method whereby a market mechanism would be created to reward virtuous behavior while punishing the polluting sinners.  Sounds like a good idea--especially to the folks who would set up the market in emissions trades.  The free-marketeers could use this scheme to illustrate that they too can address serious problems without the intervention of the nanny state while the new industries that create the technologies for carbon reduction would be funded by the old industries that refuse to adapt.  I mean, what's not to like?

Well, there's this little problem that triggered the Protestant Reformation--the idea that rich people should be able to keep on sinning so long as they bought indulgences.  In the case of cap and trade, these new indulgences would allow the polluters the right to keep on sinning so long as they could find someone else to be their whipping boy.

Sounds like the perfect scheme for kicking the problem down the road while it enriches those who have created the markets in carbon trading.  Somewhere the ghost of Martin Luther is cackling "I told you indulgences are evil!"

The Lucrative Business of Polluting

Will Trading System Encourage Emissions?

By Nils Klawitter 12/30/2010 

The Kyoto Protocol's Clean Development Mechanism allows companies to continue polluting at home by assisting in emissions reductions abroad. If its critics are right, however, the system is being massively abused and actually discourages reductions that might otherwise be made.

Nearly all European industrial companies emitting environmentally harmful greenhouse gases are required to purchase emissions certificates if they don't reduce the amount of CO2 they pump into the atmosphere. Even so, they always have another option: They can simply buy their way out and keep on doing exactly as they've always done as long as they pay for climate-protection measures somewhere else in the world.

This selling of environmental indulgences is known as the Clean Development Mechanism (CDM) -- and it is probably the most useless aspect of climate legislation to be found. CDM projects are meant to make it possible for industrialized countries to fulfill a portion of their required emissions reductions in developing and newly industrialized countries -- and at a considerably lower cost. Using this method, German companies can compensate for roughly 20 percent of their emissions.

Companies can invest in environmentally friendly hydroelectric power plants in China or India, for example, or in facilities for extracting methane gas. However, many of these operations had already been planned before the German companies stepped into the picture. And while the law stipulates that only new projects will be supported through CDM, it's not always easy to determine exactly what qualifies as new.  more 

Dealing in Hot Air

The Pitfalls of Europe's New Emissions Trading System

By Alexander Jung  12/30/2010

The next stage in the world's CO2 emissions-trading scheme will begin in two years. Everyone agrees that the rulebook is complicated and that the costs for industry will be enormous. But nobody knows if the system will really help the environment -- or merely create a burdensome bureaucracy.

Peter Scur used to spend a lot of time outdoors, converting old quarries into fertile habitats and making sure that bats remained undisturbed while making their nests in limestone caverns. It was the sort of effort one might expect from the environmental officer at a cement company.

Overburdened by paperwork these days, Scur doesn't have much time left for such activities.

Scur, a tall man with strong hands, is sitting in his office at a plant belonging to the German unit of Mexican cement-maker Cemex in Rüdersdorf, 30 kilometers (19 miles) east of Berlin, poring over files marked "CO2," or carbon dioxide.

"We are being literally inundated with laws," he says. Scur has no choice but to address the new regulations.

Now that he is the company's so-called carbon manager, Scur has to be prepared for a new era that is about to begin, not only for Cemex and the cement sector, but also for the rest of German industry. more