The devil is certainly in the details, and this article explores the details of the cap and trade discussion.
Cap and Charade
The political and business self-interest behind carbon limits.
Saturday, March 3, 2007 12:01 a.m. EST
The idea of a cap-and-trade system for limiting carbon-dioxide emissions in the U.S. has become all the rage. Earlier this year, 10 big American companies formed the Climate Action Partnership to lobby for government action on climate change. And this week the private-equity consortium that is bidding to take over Texas utility TXU announced that, as part of the buyout, it would join the forces lobbying for a cap on carbon emissions.
But this is not, as Lenin once said, a case of capitalists selling the rope to hang themselves with. In most cases, it is good old-fashioned rent-seeking with a climate-change patina.
Start with the name. Most of those pushing this idea want you to think about it as cap-and-trade with emphasis on the trading part. Senator Barbara Boxer touts all the jobs that would be created for people trying to game the system--er, save the planet. And her colleague Jeff Bingaman calls cap-and-trade "market based," because, you know, people would trade stuff.
But for that to happen, the government would first have to put a cap on CO2 emissions, either for certain industries or even the economy as a whole. At the same time, it would allocate quotas for CO2 emissions, either based on current emissions, or on energy output, or some other standard. If a company then "over-complied," which means it produced less carbon dioxide than it was allowed to under the rules, it could sell the excess allowance to someone else. That someone else would buy the right to produce CO2 if doing so cost less than actually reducing emissions.
In this way, emissions would be reduced in an relatively efficient way: Those for whom reductions were cheap or easy would reduce, and if they reduced enough, they could sell their excess allowance to someone for whom the reductions were harder or more expensive. This kind of trading works, and we've argued in these columns that cap-and-trade beats the pants off just plain capping by lowering the overall economic burden of a cap.
The difficulties don't lie with the trading, but with the cap, which is where the companies lobbying for restrictions come in. James Rogers, CEO of Duke Energy, put it plainly earlier this year: "If you're not at the table when these negotiations are going on, you're going to be on the menu." Translation: If a cap is coming, better to design it in a way that you profit from it, instead of being killed by it.
Which is why the emphasis really should be cap-and-trade. It's all about the cap, because without it there's no trading. We don't buy our daily ration of oxygen because it's in abundant supply. Same with carbon dioxide--there's no constraint on your ability to produce CO2 until the government creates one. When it does, it creates an artificial scarcity. What Duke, Entergy, TXU, BP, Dupont and all the rest want is to make sure that when the right to produce CO2 becomes limited, they're the ones that end up owning the allowances. Because that would mean they could sell them, and make money off something that previously wasn't worth a dime.
Thus, Entergy, a utility that relies heavily on natural gas and nuclear power and thus produces relatively less CO2, would love a cap that distributes the allowances based on how much electricity you churn out, rather than on how much CO2 you produce. Entergy's "carbon footprint" is small compared to some other utilities, so an electrical-output-based cap would be windfall city. Dupont, meanwhile, wants credit for reductions already made because it sees instant profit in costs already paid. It also wants a cap to cover as many industries as possible so it can make money selling emissions-reduction products.
We don't begrudge anyone the opportunity to make a buck. But there's a difference between making money by producing things people want and making money by gaming the regulatory process. There's no market here unless the government creates one, and who has the profit opportunity depends entirely on who the government picks as the winners and the losers in designing this market in the first place. So it's no wonder that almost any business that has ever put an ounce of CO2 into the atmosphere is rushing to show its cap-and-trade bona fides.
