The Trouble With Markets for Carbon
By JAMES KANTER
New York Times
June 20, 2008
BRUSSELS — As the United States moves toward taking action on global warming, practical experience with carbon markets in the European Union raises a critical question: Will such systems ever work?
Backers of these markets, which involve setting limits on greenhouse gases and then allowing companies to buy and sell emission permits, see the approach as one of the cheapest and most effective ways to control the gases in advanced economies. The presidential candidates Barack Obama and John McCain have both endorsed the idea.
[YES. AND BOTH ARE MISTAKEN TO THE EXTENT THEY BELIEVE THAT THE 'WIZARD OF OZ'-LIKE 'CURTAIN OF DIVERSION' CAST BY THE CHARACTERISTICALLY OPAQUE 'CAP & TRADE' SYSTEMS WILL RESOLVE THE ALLEGED 'CARBON CONUNDRUM' AND THE MUCH MORE SIGNIFICANT U.S. ENERGY SECURITY DILEMMA CARBON CHASTITY EXACERBATES. INDEED, EXPERTS AGREE THAT THE COSTS IMPOSED BY 'CAP & TRADE' SYSTEMS ARE NOTHING MORE THAN HIDDEN TAXES, NO MATTER WHAT THE POLITICIANS OR COMPANIES SUPPORTING THEM SAY! See: Willem Buiter, Cap & Trade is a Tax on Carbon Emissions - Fortunately!, Financial Times (6/12/08), at: http://blogs.ft.com/maverecon/2008/06/cap-trade-is-a-tax-on-carbon-emissions-fortunately/#more-261 . (Why then do politicians and outfits like BP prefer cap & trade to a carbon tax? The politicians prefer it because the cap & trade scheme, while economically equivalent to a tax, will not count as a tax in the traditional record-keeping manuals. It does not add to the official ‘tax burden’ the opposition likes to bash you around the head with. You can present cap & trade in a way that hides/obscures the fact that for it to work, that is, for it to reduce emissions, it must be equivalent to a tax by increasing the marginal cost of emitting CO2E; however, it does not look like a tax and will not show up in conventional tax burden calculations. Lack of transparency means absence of accountability. That is why non-transparent arrangements are universally valued by politicians.")]
[WE SERIOUSLY QUESTION HOW MUCH THESE CANDIDATES ARE BEING INFLUENCED BY COMPANIES THAT HAVE SO MUCH INVESTED IN THIS 'CAP & PAY GAME' THAT THEY ARE NOW RELUCTANT TO REVERSE COURSE. IN PARTICULAR, WE QUESTION THE EXTENT TO WHICH THE ECONOMIC INTERESTS OF THESE 'INVESTED' COMPANIES THAT FAVOR CARBON 'CAP & TRADE' ARE BEING PROTECTED BY THE NON-TRANSPARENCY OF SUCH REGULATORY SYSTEMS.]
[See: Willem Buiter, Cap & Trade is a Tax on Carbon Emissions - Fortunately!, supra. ("Why then do politicians and outfits like BP prefer cap & trade to a carbon tax?...A second reason is that with cap & trade, you can distribute the shadow tax revenue associated with the cap & trade scheme (that is the amount of revenue you would be able to obtain for the permits in a transparent, competitive auction) in a non-transparent manner. Give-aways through explicit grants or subsidies are not as easy. There are parliamentary committees scrutinizing revenues and outlays; there may be institutions like the UK National Audit Office that can ask bothersome questions. Life is easier with the initial allocation of permits. You can, for instance, hand out the permits free of charge to your friends (including the heavy historical polluters). This is also the reason, I believe, that the heavy emitters, including BP, favour cap & trade over taxes. They believe that the initial allocation of free permits will favour them. There is this crazy notion that past heavy polluters should not be hit too hard by schemes to reduce CO2E emissions, and that they should therefore be given gratis allowances of permits that are related to their recent past emissions record. I can see no efficiency reason in favour of this, and many a fairness argument against it, but the argument carries weight in the unreal real world.")
[THE FOLLOWING COMMENT WAS RECEIVED IN RESPONSE TO THE FT ARTICLE. (Doly - "The big problem I see with cap & trade is the following: Nobody interested mainly in monetary gain would buy carbon permits if they are more expensive than carbon-reducing infrastructure. The buyers can be safely assumed NOT to be investing in carbon reduction. As for the sellers, they got their carbon permits for free, so they make a profit at any price. In theory, there is some incentive for sellers to invest in carbon-reducing infrastructure to make extra profit; in practice, most people are happy about free money but won’t make an extra effort unless there is a big, clear profit. In short, no buyers would invest in carbon-reducing infrastructures and few sellers would. Which is not what is intended. The scheme would only start producing the intended results at the point where the market freezes, when the cap becomes low enough that there are very few sellers. At that point, the temptation to commit fraud would be fairly great for would-be buyers, and I could easily imagine extra carbon permits somehow appearing out of thin air everywhere. If/when the market freezes what we have isn’t a market any more but something akin to rationing (in the original meaning of the word, not what has been called “carbon rationing” that also contains trade)".]
[DUE TO THE SYSTEMIC INEFFICIENCIES OF CAP & TRADE AND THE FRAUD AND MANIPULATION TO WHICH IT WOULD BE SUSCEPTIBLE, ALL AT THE EXPENSE OF CONSUMERS and SMALL & MEDIUM-SIZED BUSINESSES, NEW YORK CITY MAYOR MICHAEL BLOOMBERG HAD PREVIOUSLY EXPRESSED THIS VIEW DURING THE DECEMBER 2007 U.N. CLIMATE CHANGE CONFERENCE CONVENED IN BALI, INDONESIA. LIKE PROFESSOR BUTIER ABOVE, BLOOMBERG RECOMMENDED INSTEAD THE IMPOSITION OF A CARBON TAX. See: Carbon Tax Should Replace Carbon Trading to Curb Climate Change, Says US Mayor Bloomberg, Associated Press (Dec. 13, 2007) at: http://www.iht.com/articles/ap/2007/12/13/asia/AS-GEN-Bali-NY-Mayor.php . ("New York City Mayor Michael R. Bloomberg, at a U.N. climate conference drawing hundreds of emissions traders, said Thursday the growing carbon cap-and-trade industry is vulnerable to 'special interests, corruption, inefficiencies,' and should be replaced by straight carbon taxes. Speaking of global warming, Bloomberg said, 'Most experts would agree that the way to solve the problem is with a carbon tax'...carbon trading "is attractive to many politicians because it doesn't have that three-letter word 'tax'." 'But it's a very inefficient way to accomplish the same thing that a carbon tax accomplishes,' he said. 'It leaves itself open to special interests, corruption, inefficiencies.'").]
[IN ADDITION, THERE IS MOUNTING EVIDENCE FROM 'ACROSS THE POND' IN THE EUROPEAN UNION THAT REFLECTS HOW THE ONLY FUNCTIONING NON-TRANSPARENT 'CAP & TRADE' SYSTEM IS ACTUALLY NONFUNCTIONAL. IT IS NOT ONLY UNLIKELY TO ACHIEVE THE ENVIRONMENTAL BENEFITS PROMISED BY EUROPEAN POLITICIANS, BUT IT HAS ALREADY IMPOSED CONSIDERABLE NEW COSTS ON UNSUSPECTING CONSUMERS AND SMALL & MEDIUM-SIZED BUSINESSES THROUGHOUT EUROPE. WHY WOULD THE U.S. PRESIDENTIAL CANDIDATES WISH TO SUBJECT AMERICAN CONSUMERS and SMALL & MEDIUM-SIZED BUSINESSES TO THE SAME ECONOMIC PAIN WITH LITTLE, IF ANY, ENVIRONMENTAL GAIN??]
Yet in Europe, which created the world’s largest greenhouse gas market three years ago, early evidence suggests the whole approach could fail. Carbon dioxide emissions are still rising in many industries, not falling.
[BASED ON EUROPE'S BAD EXPERIENCES, AT LEAST ONE EU PARLIAMENTARIAN HAS APPEALED TO U.S. PRESIDENTIAL ASPIRANT JOHN McCAIN NOT TO ADOPT A CARBON 'CAP & TRADE' SYSTEM IN THE U.S. See: Roger Helmer, Don't Do it Mr. McCain, Roger Helmer MEP, Straight Talking Newsletter (5/27/08) at: http://rogerhelmermep.wordpress.com/2008/05/27/dont-do-it-mr-mccain ("Asking the following question to McCain adviser Carla Fiorina - I said (as near as I can remember): 'Mike Duncan referred to policies that didn’t work in Europe, and won’t work in America. That applies in spades to Cap’n'Trade. I was very disappointed to hear that John McCain has backed this system, which has been a disaster in Europe. Please ask him to reconsider'. I didn’t quite get a standing ovation, but close to it. There was a very loud and positive audience reaction, and it was easy to sense the mood of the meeting. Ms. Fiorina has been left in no doubt of the views of Washington conservatives on the policy. She conspicuously failed to reply to the question.")].
“We currently are in danger of losing yet another decade in the fight against global warming,” said Hugo Robinson of Open Europe, a research group in London.
[See: Europe’s Dirty Secret: Why the EU Emissions Trading Scheme Isn’t Working, Open Europe (Aug. 2007) at: http://www.openeurope.org.uk/research/etsp2.pdf . (SEE BELOW).]
This week, the European Environment Agency reported that emissions from factories and plants that trade pollution permits rose 0.4 percent in 2006 over the previous year, and 0.7 percent in 2007, the first two years of the system’s operations.
[See: You Know You're a Hypocritter When...You Emit More Hot Air (CO2) Than Those Whom You've Been Crittercizing!, ITSSD Journal on Energy Security, at: http://itssdenergysecurity.blogspot.com/2008/06/you-know-youre-hypocrite-whenyou-emit.html ;THE U.K. WAS RECENTLY SHOWN NOT TO HAVE MET ITS KYOTO OBLIGATIONS. See: Holy Hypocrisy!! UK Proselytizes About Climate Change, But Can't Even Meet its Own Carbon Commitments!, ITSSD Journal on Energy Security, at: http://itssdenergysecurity.blogspot.com/2008/06/httpwww.html .]
Europeans took an early lead in efforts to curb global warming, championing the Kyoto Protocol and imposing a market-based system in 2005 to cap emissions from about 12,000 factories producing electricity, glass, steel, cement, pulp and paper. Companies buy or sell permits based on whether they overshoot or come in beneath their pollution goals.
European Union officials acknowledge that establishing such a vast market has been more complicated than they expected. “Of course it was ambitious to set up a market for something you can’t see and to expect to see immediate changes in behavior,” said Jacqueline McGlade, the executive director of the European Environment Agency. “It’s easy, with hindsight, to say we could have been tougher.”
A major stumbling block arose at the outset, when some participating governments allocated too many trading permits to polluters when the market was created. That led to a near-market failure after the value of the permits fell by half, and called into question the validity of the system.
Since then, officials have promised changes, and the price of carbon permits has largely recovered. Yet a ferocious lobbying battle is under way as European Union regulators seek to overhaul dysfunctional parts of the market by charging polluting companies more and reducing the supply of permits. Brussels is also seeking to consolidate its oversight of the market, rather than leave it partly in the hands of national governments that have proved susceptible to corporate lobbying.
“The politics you’re seeing in Europe now are the real politics of carbon,” said David Victor, the director of the Program on Energy and Sustainable Development at Stanford.
Energy-intensive industries, like power, steel and aluminum, have challenged proposals that would force them to buy many more permits than in the past. During the three years in which they participated in the first phase of the market, carbon emissions in the iron and steel sector in Britain alone rose more than 10 percent while emissions in the cement industry rose more than 50 percent, according to transcripts from the British Parliament.
Electricity producers, oil companies, steel companies and airlines are among those fighting to protect their interests, with some threatening to freeze investments in Europe unless the system is tweaked to suit them.
Meanwhile, poorer countries in the union, led by Hungary, are clamoring to overturn emissions allowances that they say are too stingy and risk undermining their economic growth.
The proposals are also under attack from environmentalists, who want to restrict polluters from using large numbers of permits from an offsetting program run by the United Nations. It funnels money to poor countries for investments that purportedly reduce carbon emissions, but the effectiveness of the program has been questioned.
“The sheer amount of lobbying creates so much uncertainty about the way these markets operate that nobody really is investing in cleaner technologies in Europe,” said Mr. Robinson of Open Europe.
Carbon markets, also known as cap-and-trade systems, have come into vogue because they are more politically palatable than imposing carbon taxes.
THE CAP & TRADE 'SCREEN' ALSO ENSURES THAT ONLY TECHNOLOGIES FAVORED BY GOVERNMENT BUREAUCRATS, AS PUSHED BY CORPORATE LOBBYISTS CONCERNED WITH SECURING A COMPETITIVE MARKET ADVANTAGE FOR THEIR CLIENTS, MAY BE USED TO MEET THE CAP & PAY RULES. THE NET EFFECT OF THESE RULES, AS DRAFTED LARGELY BY ENVIRONMENTAL EXTREMIST GROUPS IN EUROPE & SUPPORTED BY BOTH THE GREEN/SOCIALIST MAJORITY IN THE EU COMMISSION & THE U.S. CONGRESSIONAL GREEN MAJORITY, EACH OF WHICH CALLS FOR A ZERO CARBON ECONOMY, WOULD BE TO STOP THE U.S. ECONOMY ALTOGETHER IN ORDER TO FUNDAMENTALLY and PERMANENTLY RESTRUCTURE IT, WITHOUT PAYING HEED TO THE ECONOMIC COSTS INVOLVED & THE NEED FOR DIVERSE ENERGY SOURCES THAT CAN ENSURE U.S. ENERGY SECURITY. THE EUROPEAN UNION WANTS THE U.S. TO ADOPT 'CAP & TRADE' PRECISELY BECAUSE DOING SO WOULD EFFECTIVELY 'LEVEL' THE ECONOMIC PLAYING FIELD' FOR ITS OVER-REGULATED INDUSTRIES THAT ARE CURRENTLY SUBJECT TO THE FLAWED EU EMISSIONS TRADING SYSTEM.]
[MUCH LIKE EUROPEAN SMALL & MEDIUM-SIZED BUSINESSES, U.S. SMALL & MEDIUM-SIZED BUSINESSES WOULD BE FORCED TO INCUR HIGHER ENERGY COSTS & PRICES FOR MANUFACTURING & SERVICE INPUTS AND SUPPLIES, WHICH WOULD THUS RESULT, AS IN EUROPE, IN LOWER PROFIT MARGINS FOR SUCH COMPANIES.]
[MEANWHILE U.S. CONSUMERS, MUCH LIKE EUROPEAN CONSUMERS, WOULD BE SUBJECT TO HIGHER ENERGY, CONSUMER GOODS & SERVICES COSTS and A LOWER STANDARD OF LIVING, AND ARE LIKELY ALSO TO SUFFER INCREASED JOB LOSSES AS SMALL & MEDIUM-SIZED COMPANIES, WHICH CONSTITUTE THE GREATEST SOURCE OF U.S. EMPLOYMENT, ARE COMPELLED TO RETRENCH, SCALE DOWN AND/OR ELIMINATE LABOR COSTS JUST TO REMAIN COMPETITIVE. FOR EXAMPLE, THE U.S. GOVERNMENT'S ENERGY INFORMATION AGENCY & ENVIRONMENTAL PROTECTION AGENCY CONCLUDED THAT THE PROPOSED LIEBERMAN-WARNER CLIMATE SECURITY ACT OF 2007 (S. 2191) WOULD HAVE IMPOSED SEVERE COSTS ON THE U.S. ECONOMY, INCLUDING INCREASED COSTS OF LIVING FOR CONSUMERS, INCREASED IMPORT DEPENDENCE & OUTSOURCING AND REDUCED DOMESTIC MANUFACTURING. See: EIA & EPA Both Find S.2191 Climate Change Bill Would Cost $Trillions in Added Expense: How Could US Senators Conscientiously Do This to Americans?, ITSSD Journal on Energy Security at: http://itssdenergysecurity.blogspot.com/2008/06/eia-epa-both-find-s2191-climate-change.html .]
Americans pioneered pollution markets in the 1970s and used them on a broader scale with some success during the 1990s to control emissions from power plants that contributed to acid rain. American officials also pushed hard for emissions trading to be included in the Kyoto climate treaty on the grounds that markets are the most effective way of encouraging innovative emission-reducing technologies.
[WHILE SULFUR DIOXIDE and NITROGEN (SO2 & NO2 -ACID RAIN) EMISSIONS TRADING SYSTEM OF THE '80's & '90's MAY HAVE WORKED WELL, IT DEALT WITH SPECIFIC SOURCES OF REAL (AS OPPOSED TO FICTIONAL) ANTHROPOGENIC 'AIR POLLUTANTS' - EMITTENTS, UNLIKE CARBON DIOXIDE, THAT DIRECTLY & ADVERSELY AFFECT HUMAN HEALTH, WILDLIFE, THE ENVIRONMENT AND EVEN PRIVATE PROPERTY.]
But the momentum in the United States to create a nationwide carbon market ground to a halt in 2001, when President Bush withdrew support for the Kyoto Protocol. Mr. Bush said carbon controls would put an undue burden on the American economy unless fast-growing countries like China and India also made commitments to cut emissions.
Now the tide is turning again in favor of carbon markets in the United States. Although the Senate this month blocked a bill that would have imposed a cap-and-trade system to slash greenhouse gases by 2050, the issue is expected to come up again after the elections. Both Mr. McCain and Mr. Obama have pledged support for market-based systems like the one in Europe.
[AS NOTED ABOVE, THIS WOULD BE A GRIEVOUS MISTAKE THAT WOULD HAMSTRING THE AMERICAN ECONOMY and ACCOMPLISH LITTLE, IF ANYTHING, FOR THE ENVIRONMENT. THE ECONOMIC EFFECTS OF A CARBON CAP & TRADE SYSTEM WOULD PLACE A SEVERE DRAG ON U.S. GDP AND PERVERSELY ENCOURAGE ECONOMIC IN ACTIVITY.]
Mr. Obama has said he supports the use of a market to reduce carbon emissions by 80 percent below 1990 levels by 2050. His proposal would require pollution credits to be auctioned rather than given away to big industries, including coal and oil companies.
Mr. McCain favors giving permits away to big polluters before moving to an “eventual” auctioning of permits to reduce emission levels 60 percent below 1990 levels by 2050.
[THIS WOULD SOLVE NOTHING, BUT PLAY RIGHT INTO THE HANDS OF CARLA FIORINA'S FORMER COMPANY & OTHER BIG FORTUNE 100 U.S. COMPANIES.]
Americans were likely to experience many of the same problems already playing out in Europe, said Mr. Victor, the Stanford expert. “The challenge for the United States now will be to have enough pork to get people to the meal, but not to give away so much that we end up squandering public resources,” he said.
[MR. VICTOR CANDIDLY ADMITS THAT THE 'CAP & TRADE' GAME IS NOTHING MORE THAN POLITICAL POSTURING & PANDERING TO THOSE WHOM WILL BE THE MOST ECONOMICALLY HARMED. HOWEVER, THE 'CAP & PLAY' SCHEME FAILS TO CONSIDER THE INTERESTS OF SMALL & MEDIUM-SIZED BUSINESSES AND OF CONSUMERS, WHO HAVE LITTLE OR NO SAY DUE TO THE LOBBYING INFLUENCE OF THE 'BIG BOYS'.]
The biggest question hanging over the European system — and that is likely to be of major concern to American policy makers — is whether the rules can be tightened enough that they achieve the social goal [SOCIALISM] of reducing the emissions that are warming the planet.
Henrik Hasselknippe, the director of emissions trading analysis at Point Carbon, a consultancy in Oslo, said the European system was beginning to show signs of success. [THIS IS EURO-SPIN.] He said the price of carbon had been rising, and that would prompt factories and installations covered by the system to move toward cleaner power generation, such as burning natural gas instead of coal.
Mr. Hasselknippe said efforts to overhaul the European system by reducing corporate influence and government largess would mean greater certainty about price of carbon permits [i.e. - THEY WILL BECOME EVEN MORE EXPENSIVE AND RESTRICTIVE!!] during the next decade. And he predicted that emissions from industries covered by the European system would finally decline this year, by 2 percent.
[THIS WOULD MEAN LESS CONSUMER and SMALL & MEDIUM-SIZED COMPANY INFLUENCE OVER COMMUNITY POLICY AS EU COMMISSION BUREAUCRATS COMMANDING SALARIES OF OVER $200,000 PER ANNUM ASSUME EVEN MORE CONTROL OVER THE FATE OF THE EUROPEAN PUBLIC, and DETERMINE EVEN TO AN EVEN GREATER EXTENT, HOW THE EUROPEAN PEOPLE CAN & CANNOT LIVE THEIR EVERYDAY LIVES.]
Europe’s Dirty Secret: Why the EU Emissions Trading Scheme Isn’t Working
"...The Emissions Trading Scheme (ETS) is supposed to be the EU’s main policy tool for reducing emissions. But so far, it has been an embarrassing failure. In its first phase of operation, more
permits to pollute have been printed than there is pollution. The price of carbon has collapsed to
almost zero, creating no incentive to reduce pollution. Across the EU, emissions from
installations covered by the ETS actually rose by 0.8%.
The Commission insists that it has learned its lesson, and has reassured us that in the second
phase of the scheme, which runs from 2008 to 2012 will work better because it has clamped
down on the over allocation of permits by member states.
Open Europe argues however that in fact things have gone backwards for the ETS. In the second phase of the ETS member states will be able to “import” external Kyoto “credits” from developing countries in order to meet their targets for reductions. This might be unobjectionable if these ‘imports’ reflected real emissions cuts. But these credits have already been exposed as highly flawed, and often fraudulent. They don’t always reflect absolute reductions in
emissions, whilst many of these credits are generated from projects in developing countries that would have happened anyway. Such credits actually mean increased pollution.
Furthermore, many credits will be generated through a system which allows polluters to bag massive profits for very little effort. Unsurprisingly, the main beneficiaries will be large, highly capitalized firms with the capacity to attract the attention of speculative investment in potentially lucrative ‘green’ projects. Meanwhile, community level development will be sidelined, and sub-Saharan Africa will see just 4% of total investment from Kyoto credits.
The Open Europe report finds that it is highly likely that the majority of CO2 reductions in the next ETS phase will be simply 'bought in’ through these imported permits. That means the ETS won’t reduce emissions in Europe, and won’t encourage companies to invest in low carbon technology – surely the main purpose of any serious climate change policy?
The report concludes that far from creating a credible basis for EU level action on climate change, the ETS has instead established a web of politically powerful vested interest groups, massive economic distortions and covert industrial subsidies. It will do practically nothing to fight climate change. It's good news for the traders and the large firms who will reap tens of billions of euros worth of profit through emissions trading. It's less good news for those who will suffer
the consequences of global warming.
[See: Cap and Play: The New Carbon Emissions ('Hand is Quicker than the Eye') Game, ITSSD Journal on Energy Security, at: http://itssdenergysecurity.blogspot.com/2008/06/cap-and-play-new-carbon-emissions-hand.html .]