At some point in 2009, the government may get past managing the crisis du jour and turn to those nasty, seemingly intractable problems we nevertheless have to address. such as greenhouse gas emissions.
One idea that had been bandied about is the idea of cap and trade, which would allow big bad carbon emitters to buy the right to do so from those who had cleaned up their act. I’m not alone in being less than keen about this regime (the very fact that Wall Street firms are keen to act as brokers should give cause for pause, and even conservative economists like Greg Makniw prefer straight up carbon taxes to cap and trade).
But the cap and trade concept may already have been dealt a near-fatal blow. As John Dizard explains in more detail, a court ruling called the legal standing of these rights in question, and it may not be possible to dispel the cloud around them.
From the Financial Times:
The most serious struggle will be over climate change, or the regulation of carbon emissions. You can forget all the chitchat about finding a consensus on this one: the coal people and the enviros are in this match until one side is carried out….
Wall Street and Chicago always like the creation of trading markets for new assets, especially if they can be inefficiently priced by the professionals. So while the coal people hate climate legislation, a lot of traders see an opportunity.
One of the problems, though, is that there are already government-created markets for sulphur dioxide and nitrogen oxide emissions, and those markets are in trouble. As I have written earlier in this space, a Federal appeals court decision on July 11 of last year appeared to kill the long-term value of credits under what was called the Clean Air Interstate Rule, a set of markets for pollution credits created by the Environmental Protection Agency. At a stroke, some tens of billions worth of rights to emit noxious gases were slashed in value by the court’s ruling that the EPA had exceeded its authority.
The EPA, along with utilities and some enviros, asked the court to modify or reconsider its decision, and, unusually, the court had second thoughts. In late December, the court indefinitely stayed its cancellation of Cair, allowed the trading to remain in place, and told the EPA that it had to come up with a fix, sometime in the undefined future. That is the simple version.
So, the price of the right to emit one ton of sulphur over the next year, which had been up to $600-$800, fell back to as little as $100 after the initial decision, and has now, after the court’s reconsideration, risen to $150-$200. At $600, utilities found it economic to build new pollution control systems before they were required by law, since they could sell for a lot of money the emission credits they earned…..
Now, though, the court ruling, and the wider realisation that allowances under cap-and-trade are not really property rights, has chilled such markets. Risk management committees for corporate buyers and trading houses are likely to hesitate before buying pollution permits that could lose value.
So any new market-based emissions controls had better have more certainty than the flawed Cair. In leaving Cair in place, the court seemed to reason it would retain its effectiveness in reducing emissions over the next couple of years, but that is not the case. Instead, the EPA’s pollution allowance market people believe the low prices created by the uncertainty over the future of Cair will have the perverse incentive of inducing utilities to use up existing pollution allowances by emitting more than they would have, while postponing building new controls. Or so the agency’s economic models say…
The Cair mess shows that it is easy to get market design wrong. With mortgage and derivatives markets, that costs billions. With Cair, it costs shortened lives.
Now, of course, it is possible that a new, bullet-proof version of trading rights could be devised. But it would probably be subject to serious scrutiny before anyone invested in the hope of being able to sell the resulting carbon rights.