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Guest Post: Head of California’s Cap and Trade Offsets Program: Cap and Trade Won’t Work for Climate, It’s a Scam

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Paul Krugman argues that cap and trade worked to reduce sulfur dioxide and stop acid rain, and so it will work to reduce C02.

However, two EPA lawyers with more than 40 years of cumulative experience – including the guy who has been head of California’s cap and trade offset programs for more than 20 years – say that sulfur dioxide was different, and that cap and trade for climate is a scam which only benefits the financial players.

Specifically, they point out that:

  • Cap and trade was tried in Europe, but ended up raising energy prices, creating volatility, produced few greenhouse gas reductions, but made billions for the financial players
  • Even the guy who invented the cap and trade concept doesn’t think it will work in regards to climate change (see this and this)
  • Carbon offsets – which are part of the cap and trade plan – increase pollution
  • One reason that offsets lead to more pollution is that investors fight to keep toxic chemicals legal, so they can make more money off of trading the offsets
  • Like subprime mortgages and other creative financial instruments which brought us the economic crisis, carbon offsets lack integrity and don’t work (see this)

Watch the video.

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18 comments

  1. Hugh

    I agree with all of the above. Cap and trade is based on a belief that markets can come up with the most efficient solution. Events of the last two years have blown should have blown this premise to pieces and placed it on a level with a belief in pixies.

    It is also typically political in nature. A carbon tax would much simpler and more effective. So of course no one will even allow it on the table. No, a mechanism that is complicated, easily distorted, and won’t work is what our elites always opt for. Just look at healthcare reform.

    On top of this, most of the permits will be initially given away, not sold. That’s a pretty big price distorter right there. Then in the out years, as in decades from now, offsets are supposed to become more important. This is not coincidentally when many of the biggest reductions in CO2 are also supposed to occur. And offsets because many of them will happen by buying into them abroad are a scam waiting to happen, despite all the talk of safeguards.

    For me, this all seems like another setup where we end up paying for a policy that doesn’t work but which our elites can tell us was better than nothing, again.

    1. Anonymous Jones

      Nice comment, Hugh. Sad but true. We are in a positive feedback loop (with negative consequences) in which the elites get more power and money and then use that power and money to get even more power and money. It shall not end well.

    1. Steve

      You want a carbon tax? I’ll give you a carbon tax. An international carbon tax, enforced by the United States, so that countries like China can’t cheat. China resists paying it? We’ll slap any Chinese export with a tariff. Otherwise, no carbon tax.

  2. freshlymintedbureaucrat

    Cap and trade is a house of horrors. And it is not only the potential of purely financial, “private” rent-seeking that should scare people. It is conceivable that jurisdictions with similar trade balances might cooperate at some point to create a protectionist bloc through a cap and trade system (I’m thinking of US, CN, JP and others).

    But is the latter a credible scenario?

  3. Bob Goodwin

    Paul argues that Cap and trade is a free market solution. That is as much true as torture is an act of diplomacy.

    The global warming debate is nearly as toxic as abortion at this point. If a make a pro abortion statement to a religious conservative I get anger. If I make an anti global warming statement to a progressive, I get ad hominum attacks. And it looks like the scientists have been required to perform unnatural acts to stay in the cult.

    And now I find myself having to be against clean air (and life!) out of disgust for the manipulation of the debate.

  4. gordon

    One of the most irritating things about the cap-and-trade debate is the way everybody forgets its history. Cap-and-trade only appeared in the AGW policy debate in the context of Kyoto; it was inserted there at US Govt. insistence and through the anxiety of other parties to get the US (then the world’s biggest emitter) to sign up.

    Gar Lipow has an old post which presents some of this history here:

    http://www.grist.org/article/cap-and-trade-filling-up-the-political-space-that-should-be-used-for-real-s/#CarbonTrading

    From that post: “Long before the Kyoto treaty, most of the world knew emissions would have to be reduced. It was taken for granted that treaties would lead to national regulations, national public spending, probably reinforced by some sort of carbon tax. But all this was happening during the ideological triumph of Reaganism and Thatcherism, long after the actual time in government of Reagan and Thatcher had passed. Regulation? Taxing? Public spending? These were all seen as old fashioned failed policies. We needed something new and exciting, something that could be labeled as government free. And out there was the Sulfur trading story…”.

    I am so sick of everybody forgetting this, and forgetting that there was a time, not so long ago, when people debated emissions-reduction policy without talking about cap-and-trade at all.

  5. psychohistorian

    This is a prime example of where the oligarchy is able to control the entire playing field of “public” discussion around the subject. They define what the mid-field marker is and which narratives are totally out of bounds of “civil” discourse/play.

    Them that control the media control the discourse. That is why we are here sharing textual white noise about our broken social system.

  6. Stelios Theoharidis

    It isn’t just banks and investors that win from cap and trade. The way that the climate registry is playing out consultants working in that industry will have a windfall from independently auditing carbon inventories for firms as well as offsets.

    Although I agree with their general argument I don’t buy that all offsets are bad. The ones that clearly go straight into the deployment of renewable energy technology and some other projects have real benefit, and sometimes a number of positive externalities (eg deploying efficient stoves in developing countries = better indoor air quality one of the number contributors to high mortality rates, reduced impact on local biomass, time savings for the extremely poor, and less carbon dioxide)

    I’m definitely in favor of a carbon tax, the danger however, is that it gets neutered like what has happened thus far with the cap and trade system (eg distributing 85% of credits for free). I doubt that large agro operations that raise farm animals will get hit in either cap and trade or tax scenario. From an operational standpoint I think Brookings estimated that over 90% of energy could be taxed within a couple thousand sources. That is much more efficient from a regulatory standpoint than the system in play with cap and trade,

    If you want to get conservatives on board one idea is to recycle some of the procedes from the tax into reduced payroll tax payments for small businesses. It will reduce disincentives towards hiring and increase incentives towards energy efficiency. However, you will need to make clear progressive increases in the carbon tax over time to promote further efficiencies and offset losses to social security. In addition there will need to be some sort of rebate system for the poor since increased energy costs will hit them the hardest.

    What is really necessary is a system that will recycle a large percentage of the proceeds from a carbon tax into lending for small to large scale efficiency and renewable energy projects. This might be a means to get the financiers to back off cap and trade but I definitely don’t want to see another round of securitization. Otherwise politicians are going to treat this revenue stream like they treat every other one, like a damn piggy bank.

    1. psychohistorian

      You said at the end: “Otherwise politicians are going to treat this revenue stream like they treat every other one, like a damn piggy bank.”

      I would argue that it is not the politicians that we have no control over here. It is the money and power that has corrupted the political system such that they can bribe the politicians to give them our piggy bank. Those folks behind the screen are who I think need exposure and control.

      1. aet

        What we have no control over is the physics.

        The petro-age has to end, and relatively quickly, to avoid possible extinction (never mind preserving “lifestyles”):
        Whereas but thirty years ago, it was thought that the petro-age would last as long as the petroleum itself lasted.
        The force & scope of the cost of the negative externalities to its use have become too great to ignore.

        That’s a difficult perceptual shift for those invested in how things were to make. So the political row and denial is understandable.

        But we’ve got to hold the line on emissions.
        That is all. How is irrelevant so long as it be done quickly. Time is the enemy, here.

  7. Demented Chimp

    Glad this is finally gaining attention. Seeing as the derivatives created consumer debt bubble has actually driven increased emissions and pushed us further down the road to calamity. Why o why would we ask them back to the table to clean up the mess they created! They are the problem.

    The lesson is very fresh in peoples minds and bankers are public enemy number 1. Time to drive in the stake, but we all have to grab the handle and soon.

  8. SD Rodholm

    An economy-wide carbon tax seems simpler because it exists only Platonic form. The cap-and-trade law is open to attack because there are now House and Senate versions of the law that people can read and critiqued. It is important to remember that almost everything in the economy emits carbon, and many major emitters are wealthy industries powerful lobbyists. Any tax that went through congress would not automatically be in a simpler, more effective form simply by dint of its being a tax. Think about the US income tax code. Comparing cap and trade to a carbon tax is like comparing an A380 to a magical flying unicorn. Of course the magical unicorn flies more elegantly, and without emissions.

    It has been a very long fight to get the congress and the America public to the point where cap and trade can even come to the House and Senate floor. It is still unclear whether or not it will pass because support for the bill is tenuous. If cap-and-trade is not going to pass, a tax is definitely not going to pass, and running around calling for a tax merely makes the discussion more fragmented and benefits people who want to do nothing at all.

    I understand that cap-and-trade came fairly recently into the discussion. However, it has been but instrumental in moving discussion of climate change out of marginalized circles and into mainstream policy.

    That said, the arguments against cap-and-trade are quite legitimate. If the system passes, it will be incumbent upon the architects of the system, and public citizens to carefully construct and police the system if it is to be effective. All of this will be a monumental task with a risk of failure. However, any solution to global warming carriers those risks.

    Regarding the bullet points in the initial post-
    · Cap and trade was tried in Europe, but ended up raising energy prices, creating volatility, produced few greenhouse gas reductions, but made billions for the financial players.
    In the first phase of the system the cap was too high. This phase was considered a test phase, that occurred before the European governments has reliable, audited data on actual emissions and had to rely on facilities to estimate their emissions. The facilities, as could be expected, over estimated. The ETS is working to correct this in the second phase, and there are indications that this is successful. I have not seen good data (anyone?) on the efficacy of the EU-ETS in the second phase, and obviously this is an important part of knowing whether the second round efforts have been more successful. However, given that the failed phase, (referred to in the bullet point above) was the first attempt to run a carbon ETS ever, and was billed as a ‘test phase’ it seems wrong to say that, based on the problems that it had, the whole idea of an ETS is stupid. Imagine of Orville and Wilbur Wright had thrown up their hands and said, “Oh well! I guess that didn’t work!” after their first airplane didn’t get off the ground.
    · Even the guy who invented the cap and trade concept doesn’t think it will work in regards to climate change (see this and this)
    Yes, there are vastly more emissions sources for carbon dioxide than sulfur or NoX, and many of these sources are not point-sources, and cannot be measured using continuous emissions monitors. This means that in order for the system to be functional, it will have to employ rigorous and competent auditors, and be run by intelligent and careful policy makers and oversight bodies. As yet, the system has not quite gotten this right. I used to believe that this problem was surmountable. Watching recent non-regulation of banking has given me serious doubts. However, this is a problem of corruption and lack of political will, and will have to be dealt with in any attempt to regulate carbon and transition to a cleaner energy economy.
    · Carbon offsets – which are part of the cap and trade plan – increase pollution
    No, not necessarily. Yes, if they are poorly administered this can happen. Just because it is possible does not mean that it is inevitable.
    · One reason that offsets lead to more pollution is that investors fight to keep toxic chemicals legal, so they can make more money off of trading the offsets
    Yes, but in all aspect of the economy actors will fight for measures that are in there interest, even if they are against the interests of the public. This is not a special feature of cap-and-trade. This is why intelligent regulation is necessary.
    · Like subprime mortgages and other creative financial instruments which brought us the economic crisis, carbon offsets lack integrity and don’t work (see this)
    A carbon financial instrument is a fairly straightforward commodity contract at this point. The congress is currently considering measures to restrict OTC carbon transactions, which will increase the transparency in the market. Insurance instruments or carbon bonds could be useful instruments in developing the market as well. A large number of players, including the UK government, are looking at developing these products. They are not being single-handedly created by Blythe Masters, and frankly even if they were, it might not bode well, but neither would it mean that there is a one-to-one relationship between ‘the creative instruments that brought us the financial crisis’ and carbon instruments. Like any financial product, it is important that regulators ask the question, “what is the purpose of this instrument? Is it serving an underlying purpose (IE, creating security for investors taking risks on more volatile, avoided deforestation credits), or it simply a good way for a broker to create something ephemeral, and make money by offloading it before they are killed back on the back end of the trade?”

    We have not been so good at this king of regulation in the US lately. I get it. And it is not looking promising. I am concerned about this too. But I don’t see this as a problem intrinsic problem with cap and trade, so much as a problem with our political system. And if you get rid of cap and trade and go for another solution, that problem will still be there to interfere with the efficacy of the next, newest best solution.

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