Is Cap & Trade the market-based answer to reduce greenhouse gases..??
Americans are a stubborn lot. We resist change and even the most minor of inconveniences. And I suspect the newly emerging ‘Cap & Trade’ schemes under the American Clean Energy & Security Act — also known as the Waxman-Markey bill — just passed in the House, and now being hotly debated in the Senate, will be no different. Cap & Trade is an environmental and energy-use policy tool that has delivered impressive results in other industrialized developed nations (See carbon emissions chart below) by mandating an annual global cap on emissions while providing market-based tools, resources and flexibility in how to comply. Successful Cap & Trade programs reward innovation, efficiency, and early action and, ideally, provide strict environmental accountability without inhibiting economic growth. Examples of successful cap and trade programs include the nationwide Acid Rain Program and the regional NOx Budget Trading Program in the Northeast. Additionally, the Environmental Protection Agency (EPA) issued the Clean Air Interstate Rule (CAIR) in March 2005, during the Bush administration, to build on the success of these programs and achieve significant additional emission reductions.
The concept of tradable carbon allowances for manufacturers, governments and corporation, though new to Americans, is not unfamiliar in most other developed nations, where carbon trade has proven successful. The idea is that manufacturers, corporations and governments — the largest end-users of carbon based energy — are allocated a fixed number of carbon units for the purchase of energy and fuel, but which can also be traded on an open market. All these entities receive an equal allocation initially, but those who use less can sell their excess credits to those who want or need more in a regulated Market. All this takes place in a framework where the total number of units is capped and regulated. And the economic principles for the consumption and utility of these carbon credits that will drive this newly emerging Cap & Trade Market is what I referred to earlier as ‘Carbonomics.’
But even more radically, with carbon trading by governments and corporations proving successful, and in order to reduce the ‘carbon footprint’ of individuals, in Britain they are now considering a personal carbon trading scheme that will give everyone a free, equal allowance of carbon units, which can be exchanged for carbon-dependent consumption credits and usage — say for oil, gas or electricity — or, it can be traded in a market, but whose overall goal is to drive carbon use down, ergo driving down exigent consequences such as global warming, air pollution and carbon-based energy dependence. The concept was first proposed in the mid 1990s, when it was largely ignored — and I was guilty of this — as utopian fantasy and untenable in ‘the real world.’ But it is now being taken seriously by the British, China and So. Korea, among others. In addition, there is a potential for a global carbon trading market, in which more efficient nations could trade credits with other less efficient countries, lending credence to the emergence of promising new frontiers.
2002 Carbon Emissions by Nation (Source: Oakridge National Labratory CO2 Emissions 2002)
If you’re interested about learning more about this topic, the Center for American Progress – a think-tank dedicated to improving the lives of Americans through progressive ideas and action for a strong, just and free America — has written an excellent primer on the topic titled: Cap & Trade 101. You can download a PDF version of that document here.
Read more about the ‘Ins & Outs of Cap & Trade’ here.
FAQs about the U.S. Climate bill here, courtesy the Miami Herald.
2 Comments So Far»
Wow, I’m impressed! This is a topic I’ve been hearing a lot about, but had no clue where to begin. You took a complicated, confusing issue, KISS’d it (Kept It Short & Simple), and made it palatable and easy to understand by simpifying it to its component parts. I also enjoy many of your other blog posts: It’s a compelling blend of intelligent, nuance, cynical, lucid and clear writing. There is one thing though…
Why is it wrong for traders and investors to make a profit, if the practices themselves are not illegal? Certainly you can’t blame financial innovation, can you? I say let the chips fall where they may if the best and the brightest find ways to create wealth that benefits all of society. Anyway, that’s my two cents. Keep up the good work and I will keep reading.
Blog Head,
Thank you for your kind comments. I’m glad you enjoy my writings and insights, and I hope you keep coming back — it only gets better. Now. . .
As for your question, there’s absolutely nothing wrong with brokers, traders and invement banking firms making an honest profit. However, from time-to-time here on the Global Markets blog I’ve tried to use my industry “insider” insights to expose some unseemly practices that cost investors, and ultimately confidence in the financial system, lots of capital. That is to say, that there is something wrong when brokers, traders, hedge funds and investment bankers leverage an already HUGE assymetrical advantage in terms of price, timing, availability and methods (so-called “best practices”) game (i.e., cheat!) the system to take advantage of consumers and investors to the tune of billions upon billions in the name of greed and profitability. That, in my humble opinion, is niether fair, nor free trade. What’s happening in the financial system takes the concept of ‘caveat emptor’ to a whole new level! And we are, afterall, a nation of laws; and as investors you have equal protection under the law — whether those laws are broken by individual private citizens, or by corporate citizens — they ought to be held accountable for breaking the rules, cheating, and undermining the capitalist system. It is truly ironic to me that it is Wall Street and the banking system that is responsible for ruining capitalism with their outlandish practices (See my earlier post: How Wall Street Ruined Capitalism) so much so that we are now debating replacing, or at least restructuring how we play the game, to level the playing field. I say make profits — I am afterall, a capitalist too — but do so fairly, responsibly and legally; and perhaps with a mind to how such practices affect human lives and families. That’s all I’m saying. . .
Leave Comments Below»