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Dec. 7 2009 - 10:57 am | 27 views | 2 recommendations | 11 comments

Krugman endorses the next great bubble machine: Cap and Trade

Coal power plant in Datteln (Germany) at the D...

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I was very sad to see Paul Krugman hocking the cap and trade system in his column today. Krugs is very popular among liberals right now, namely because he has stopped screaming about the virtues of Hillary Clinton, and isn’t being a total moron when it comes to the economy. His words carry weight, which is why it’s sad to see him defend corporations’ preferred system of pollution regulation, the Cap and Trade supposed panacea.

In anticipation of Copenhagen’s climate summit, many journalists have been rightfully stressing the urgency for dramatic emissions reform, and are also calling for immediate action by the world’s leaders. These journalists say that it’s time to stop arguing with lunatics in the hopes of forming some pragmatic bipartisan legislation. There are the facts and then there are the lies. There is the Arctic Climate Impact Assessment, the more respected summary of the science affecting the Arctic. Real-life scientists — not the idiots over at Red State — report there is more carbon stored in the Arctic’s methane hydrates than in every lump of coal and barrel of oil in the world. When the arctic melts (and it is melting,) that’s a big problem:

“If even 1% of the methane stored in Arctic-shelf hydrates were released to the atmosphere, it could cause really abrupt warming,” says Susan Joy Hassol, the analyst who along with 300 climate scientists wrote the Arctic Climate Impact Assessment…Some scientists believe that when this happened 250m years ago, it triggered the largest extinction event in history: 95% of marine animals and 70% of land-based animals died.

Then there’s the obsession over the e-mails of one group of scientists, who at worst can be accused of scientifically immoral practices. For the record, the IPCC still calls global warming “unequivocal” and rising human greenhouse-gas emissions were “very likely” the main cause. The actions of a handful of shady scientists hardly discredit a decade’s worth of scientific research. (Side note: Why didn’t Conservatives call for the End of Capitalism after Goldman Sachs fucked the planet? Those asshole deserved way more derision than a few bad apple scientists.) So it’s time to stop humoring the global warming deniers. It’s not like we tried to “meet half way” with the people that wanted to keep burning women who were accused of being witches.

We’re told the most rational rationalists (and also Senator James “truth squad” Inhofe) will meet in Copenhagen as part of an “Adults Only” conversation about how to deal with very real global warming. Unfortunately, the Rationalists seem to be treating the most effective anecdote to pollution — a carbon fee — as a secondary measure to the preferred system, Cap and Trade.

There are several reasons CT is inferior to carbon fees, or carbon taxes, according to the Carbon Tax Center.

  1. Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
  2. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
  3. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
  4. Carbon taxes can be implemented with far less opportunity for manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
  5. Carbon taxes address emissions of carbon from every sector, whereas some cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.
  6. Carbon tax revenues would most likely be returned to the public through dividends or progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.

Numbers 3 and 4 are biggies. Unlike the carbon tax, CT is extremely susceptible to manipulation by private industry. In The Great American Bubble Machine, journalist Matt Taibbi explains how the new game in town — the next bubble machine after subprime mortgages — is in carbon credits. Companies will need to have carbon credits in order to pollute, but Taibbi reports the new carbon credit market is virtually identical to the “commodities-market casino” that’s been so good to companies like Goldman Sachs.

The reason there’s been much more support for CT than the carbon tax is because — quite simply — CT will be great for business.

Here’s how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion.

Goldman has been pushing hard for CT because they’re going to make tons of money from it, and other industry hasn’t been zealously opposing CT because it’s not abundantly clear how the government is going to enforce it anyway.

Laurie Williams and Allan Zabel, two longtime EPA enforcement attorneys, claim CT is fatally flawed. The couple instead advocate for a solution involving carbon fees with rebates. Williams explains that CT means facilities need to reduce their emissions on a yearly basis until a certain level is met (the “declining cap”). The “trading” part means that if some facilities have more trouble than others reducing their emissions, they can buy pollution permits from other facilities that are having an easier time reducing. Except, in the CT system being hocked by the US, facilities can meet their obligation to reduce, not only by buying permits from other facilities, but by buying carbon offsets. Congress’s CT bill specifically authorizes more than two billion tons a year of offsets, which would be enough to cover all required reductions for almost twenty years.

Basically, offsets blow the “cap” off “cap and trade.” The Toxic 10 (the worst polluting companies in America,) could continue to pollute as long as they can rationalize doing so with some unverifiable bullshit. Ford could continue to produce the second-worst gas-mileage fleet in the country, but plant some tree saplings out back and call it even.

Allan Zabel: [W]e think offsets—offsets are reductions in greenhouse gases which happen outside the capped sources, and offsets, especially in a world market, cannot be adequately enforced or policed, and you’re not sure whether the reductions are real, whether they go beyond what would have happened anyway.

And since the cap-and-trade bills before Congress include so many offsets, these programs could be run for approximately twenty years while relying on reductions only from these offsets. And so, we think that the—this fatal flaw locks in climate degradation for approximately twenty years.

In his op-ed, Krugs points to the United State’s 1990 sulfur dioxide (acid rain) reduction as a model for CT success. Except, Krugs ignores the fact that acid rain CT (with no offsets) is very different from climate change challenges facing us today.

In the acid-rain program, the EPA shepherded a few hundred existing coal-fired power plants through a relatively manageable switch from high-sulfur coal to readily available and affordable low-sulfur coal. Some facilities with large reserves of high-sulfur coal added scrubbers, an existing technology.

In the case of climate change, however, we are not simply modifying the operation of a relatively small number of existing facilities. We need to create strong incentives to increase energy efficiency throughout the economy and to invest in new clean-energy infrastructure. Cap-and-trade is an ineffective tool for that, because it does not reliably end fossil fuels’ price advantage.

Oh, then there are all those other times CT has failed.

[A] Los Angeles cap-and-trade program designed to reduce ground-level ozone ended up issuing permits for more pollution than was actually being emitted. It took more than five years for the “cap” to be ratcheted below pollution levels, whereupon the price of permits skyrocketed and utilities threatened rolling blackouts. Cap-and-trade had produced little besides delay.

In Europe, [Kyoto Protocol 1's] cap-and-trade has failed to deliver on climate change. It yielded windfall profits for utilities, but few reductions in emissions or investments in clean technology.

While U.S. officials vowed to learn from Europe’s mistakes, the bill sponsored by Reps. Henry Waxman (D., Calif.) and Edward Markey (D., Mass.) has many of the same flaws and adds massive “offsets” that blow away the “cap” in “cap-and-trade.” Offsets allow polluters to, for example, pay to preserve an acre of forest so they can continue burning coal above the cap. The concept’s problems are legion and well-documented.

Corporations profit from CT, while they continue to pollute the planet. Sounds awesome.

Williams and Zabel call for a carbon tax with rebates, or a “carbon fee.” In 2008, the Congressional Budget Office recognized that carbon fees are the most efficient means to achieve meaningful emissions reductions in the necessary time-frame.

James Hansen, the head of the NASA Goddard Institute for Space Studies in New York City, says the acid rain CT can hardly be called a success story. Sulfur emissions have been reduced by 43 percent…in the two decades since its inception. Furthermore, the economic model of CT encourages the continuation of pollution, and it doesn’t even apply to some of the worst offenders:

Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate. If every polluter’s emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear.

Worse yet, polluters’ lobbyists ensured that the clean air amendments allowed existing power plants to be “grandfathered,” avoiding many pollution regulations. These old plants would soon be retired anyway, the utilities claimed. That’s hardly been the case: Two-thirds of today’s coal-fired power plants were constructed before 1975.

CT may not work, but it will probably become the preferred method of dealing with global warming — not because it will work by saving the planet– but because it allows industry to skirt emissions cuts, while the financial industry gets to play with a trillion annual dollars of carbon credits. All the right rich people win!


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  1. collapse expand

    In Australia the chief government research body, the CSIRO has attempted to censor a report critical of cap and trade schemes and favouring carbon tax.
    http://www.news.com.au/breaking-news/clive-spash-resigns-from-csiro-after-climate-report-censorship/story-e6frfku0-1225806539742

  2. collapse expand

    Ms. Kilkenny,

    The only real question here is, does C&T work? C&T has been in use for almost 20 years for SO2 & NOx (Title IV of the 1991 Clear Air Amendments). Have examined this to see if it is indeed effective? If it is, why should it not work for carbon? If it were ineffective, then that really the greatest argument against C&T. It is sort of like the health care reform debate, the opponents drone on and on about the “risks” and “unknowns” as if no government anywhere has every been involved in health care before. If you want to argue against C&T you need to look to where it has been implemented before. Abstract discussions about maybes are far less useful than concrete discussions about what has actually happened.

  3. collapse expand

    Americans want jobs…not carbon taxes

    Carbon taxes and Government Forced Health insurance are the New Slavery

    and Obama wants to be America’s slave master….

  4. collapse expand

    andylevinson: “Americans want jobs…not carbon taxes”
    Jobs at Natural Gas power plants, public transportation systems, Wind power farms, Solar power plants, Wave power stations, and so on. Thats just what we can do right now today with out even going into emerging or experimental systems.

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