Cap and Trade Made Simple
Two Little Words
You thought the debate on health care made your hair hurt, wait until you get a load of cap and trade. Nobody can make this stuff simple, but we will give it our best shot. Let’s start with the two words, cap and trade.
Cap. A limit on the amount of carbon dioxide (CO2) emissions that certain U.S. industries -- electric power generation, natural gas, transportation, and large manufacturers – collectively will be allowed to produce in a year. The idea is to gradually reduce the total amount of annual CO2 emissions down to levels that won’t force excessive global warming.
Current legislation calls for a 17 percent reduction in emissions by 2020 and 83 percent by 2050, although what would be measured and how it would be measured remains a question. Also, you will note that the real pain is put off until well into the future.
Trade. Each large factory or power plant producing CO2 emissions would get permits for their slice of the annual allowable emissions pie, within which they could operate without penalty. (Some proposals would make them pay for these permits; the current bill gives about 85 percent of them away free of charge.)
It is a given that some operations will emit more than they are permitted, while others will emit less. So if a factory has pollution permits to burn, so to speak, they can trade what they don’t need to companies that are over their allotted limit in return for a cash payment. The cleaner companies reap rewards at the expense of the dirtier companies. The trades are made by brokers who specialize in carbon trading, just like stock brokers who specialize in selling stocks and bonds.
A Simple Plan
So what could go wrong with this? Well, for starters, nobody has yet gotten China or India to go along with reducing their CO2 emissions. They insist that The United States first commit to very high reduction goals, something that ain’t gonna happen. Some U.S. legislators want to include tariffs on their goods and services if these two countries don’t get with the program. Others worry that this will start the mother of all trade wars.
Then there is the whole idea of giving away the permits. The original idea was to auction them off and use the proceeds for tax cuts or to fund other government programs such as health care reform. Needless to say, the big power companies want to get as much as they can for free. (As it stands now, about 85 percent of the permits will be given away. If you wonder why, think about how many campaign contributions you make versus the amounts the lobbyists and special interest groups spend each day.)
One huge bone of contention is the very essence of the plan, turning CO2 into a tradable commodity. Some folks think that invites manipulation and distortion of market operations, as it has with oil. Of course, those who would make money in this schema like the idea. That includes our old friend Al Gore, by the way.
Another big sticking point is agriculture. Farming uses a lot of energy and fertilizer, and farmers worry that costs for these commodities could rise substantially as a result of cap and trade. So their default position is to oppose the bill unless something is done for them.
Which brings us to carbon offsets. If I am a humongous power plant and I go out and invest in a tree farm or a company that makes improved anti-pollution devices, then that ought to be worth something, right? If I am a farmer and I use good farming practices such as no-till farming or if I buy equipment to capture methane from my hog poop, then doesn’t that help reduce carbon emissions?
The good news is that carbon offsets may get you more buy-in from the farm states. The bad news is that nobody knows how to put value on these offsets, which you would need to keep track of how well the program is actually working. How do you compare emissions from a factory with the carbon intake and oxygen output of a stand of pine trees? Talk about apples and oranges.
Bottom Line
As with everything else, the devil is in the details. Cap and trade worked great for acid rain, which is why some groups are pushing hard to apply the same concept to CO2 emissions. The trick is to set meaningful (not politically realistic) goals and then to actually achieve the reductions needed. One big difference between the acid rain program and the proposals for CO2 cap and trade are the offsets that could allow companies to claim emissions reductions by doing things that may or may not be directly related to reducing emissions.
There isn’t even a Senate version yet of the bill yet, so we have miles to go before we sleep on this one. The debate may not generate the heart that health care reform did, but certainly the money will be flowing just as freely from the lobbyists to the politicians. That you can be sure of.
Sources:
Opposing Views: Cap and Trade for Dummies - What Everyone Should Know
The Phoenix: Cap and trade explained
Oxford Analytica: Obama Faces Uphill Climate-Change Battle
Center for American Progress: Cap and Trade 101
Solve Climate: Cap and Trade in Perspective: Stopping Acid Rain
Seeking Alpha: The Problem with Cap-and-Trade Offsets
Farm groups seek stake in House climate bill
Inside The Great American Bubble Machine
| Comments |
|
