Cap and Trade

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I've heard about "Cap and Trade" but never really bothered to better understand it other than from sound bites, which isn't a healthy approach to understanding anything.

The basic idea is to cap the emissions of an obviously undesired pollutant but allow emitters the option of "trading" their overage for financial instruments usually called "allowances." Allowances generally cost a certain price for a quantity of pollutant, such as a ton. The allowances are theoretically priced to reflect, in some regard, the cost of complying per ton of pollutant without having to lay out the capital to bring emissions below the current regulatory standard.

Like anything, these costs of allowances change. The price of energy changes, which might make the cost of the allowances seem significant or negligible as related to other costs. Similarly, the cost of compliance can change as better, more efficient technologies come about. And, as a result, the price changes like a commodity.

The EPA released a study on sulfuric acid (acid rain) and ozone based on history over the last 10 years or so. It points out some pitfalls but overall suggests that when allowances are costly, companies prefer to invest in controls rather than pay the higher costs or gambling that the future price may decline. Though from what I would consider to be a biased source, the EPA reads fairly objectively and indicates positive results in these two instances, namely reduced emissions.

Currently, "Cap and Trade" is most bandied about concerning carbon dioxide emissions and the threat of global warming. I'm not a scientist, but I don't believe that global warming is something to be measured by the decade. In the 1970's, we were fearing the coming ice age. Now, it's global warming.

I don't discount the numerous scientists who believe global warming is occurring. If it is so, the question is whether or not humanity contributes significantly to the process, which from everything I've read is not conclusive. The current polar ice cap melt was an issue between 1920 and 1940 during similar weather patterns, but it recovered well enough on its own without human taxation as a means of improvement.

There do seem to be a number of observable consequences of warmer weather patterns, but the cause and effect is persuasively argued by parties on both sides of the argument, depending on which result they want it to be. As with any such study, I'm a cynic who says it matters who pays for it and who their intended audience is.

Al Gore is also not a scientist. Though from another biased source, the following video neatly recaps a couple major errors in his movie, "An Inconvenient Truth."

Aside from the delayed effect of C02 emissions following increased temperatures (the point being, heightened C02 levels are the effect, not the cause), it's also notable that there have been so many observed instances of this phenomena. Yet the latest cycle is supposed to be due to man's activity on the planet. Hmm. A purported total of 35 errors in his movie can be read here.

Does it matter? No. All scientific debates aside, it's now a political matter where dissenters become villanized. None of us want an inhospitable planet, so we'll suffer through the costs of doing what we can.

What are those costs?

Some would prefer a tax. Regardless of how polluting an activity is, a tax would make people pay who produce it, whether it be industrial, residential, or any other source. As all costs are ultimately passed on the consumer, it basically encourages people to buy less stuff, thereby cutting production levels which cuts emissions. Could work well enough, at least for those still employed.

Allowances. They cost as well, and those costs are also passed on the consumer eventually. The trick with these, as described earlier, is following the money. I'm not there yet. It's clear that governments can profit by auctioning off the allowances and then use the money to fund energy-efficient projects... if they can be trusted not to divert funds. Some States already do this. Once the other States or countries realize the money to be made, they'll flood the market and ruin it for everyone. Don't worry, if you were, an international overseer isn't far off.

But companies can also receive credits by reducing their emissions below targets, then sell these to others - apparently directly or on special markets for these financial instruments. In other words, people/businesses other than governments can make money off of them. And, there's already some entrepreneurs who build polluting plants with the purpose of rehabilitating them to earn credits worth more than the cost of the fix.

There's always someone working an angle, and among verification of a pollutant's emissions and/or improvements, the trading or sales of allowances, and re-routed funds, there certainly seems to be an open invitation for abuses.

The other proven loophole is for companies simply to off-shore the worst of their emission generating operations to countries who don't participate in the Kyoto agreement, the business decision du jour for reducing overhead.

Carbon offsets. Currently, this is a voluntary "cap and trade" on an individual level. There's a lot to read about these, but they seem to appeal to people who either feel personally guilty about their personal impact on the environment or to those who wish to participate for public relations benefits as being considered "green" or environmentally sensitive. The latter has increasing attraction as more and more purchasing decisions or contracting requirements specify preference for "green" suppliers. Monies paid for offsets are voluntarily made directly to organizations that purportedly invest the money in wind farms, tree planting, and other eco-friendly endeavors.

Carbonfund is one such non-profit whose site reads very well, though I'd be interested in finding out the efficiency of the money given to any such organization. Is the money simply given away to other enterprises that need funding? Is it invested into legitimate businesses with the expectation of returns? Is it shell-gamed into privately owned corporations where profits are retained? The money has to be transmitted to someone, so is there any accountability for use and results? Etc. I looked with the help of my friends Google and Bing; there's not much in the way of clear and validated examples, but here's one (grant amount not specified. hmm).

Lastly, a British politician has recently recommended personal carbon allowances that would have the effect of law. Wait a few years; it will gain increasing momentum as governments seek new sources of revenue, plus it has the socialistic advantage of affecting those who (unfairly) consume more. Privacy issues notwithstanding, it's possible that chili sales would plummet. But if that's what it takes to save the polar bears and stop hurricanes, I'm all for it... during the summer, at least.

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