Thursday, October 2, 2008

Cap and Trade Won't Work and the "Free Market" Ain't Free

Angela Johnson Meszaros
Director of Policy and General Counsel
California Environmental Rights Alliance

“Cap and Trade” won’t work.

Don’t want to take the California environmental justice movement’s word for it? Think that environmental justice organizations from around the country got it wrong?

How about taking the word of Steve Rayner, a lead author in Working Group III of the Intergovernmental Panel on Climate Change, who recently wrote in Wired Magazine:

Cap and trade won't work. The market for carbon offsets is widely touted as the best way to curb greenhouse gases. This would be fine if time were unlimited. However, the best available science suggests that we need to stabilize emissions by mid-century. That's too soon for carbon prices to rise enough to drive the R&D necessary to enable cleaner alternatives to compete with fossil fuels.

It doesn't help that the cap-and-trade approach relies on underdeveloped monitoring and accounting systems that inevitably leave plenty of wiggle room for unscrupulous speculators to work the system, amassing fortunes while achieving nothing for the atmosphere.

This September 22, 2008 article is just one of the newer statements regarding “cap and trade.” There is actually very robust opposition to “cap and trade.”

For example, in November 2007 the New York Times reported:

Most economists consider a carbon tax a more effective instrument for reducing greenhouse gas emissions than the other major policy alternative, a cap-and-trade system that would require plant-by-plant emission measurements and could prompt companies to cheat.

As we watch the United States' whole financial system melt down, the notion that California is planning to put into place a system to address greenhouse gas emissions that “prompt[s]companies to cheat” is something we should take very seriously.

Look at what has already happened in the European Union’s Emissions Trading Scheme (also referred to as the EU-ETS) adopted under the Kyoto Protocol. Under that Scheme, companies can claim reductions in their emissions if they purchase “offsets” from the “offset market.” This is a very popular option because these “offsets” are cheaper than actually reducing emissions at a facility by updating equipment or reducing fossil fuel use (which, by the way, is actually what needs to happen to reduce greenhouse gas emissions).

Two researchers at Stanford studied this “offset market” and wrote an article about their findings. They wrote:

This article reviews the actual experience in the world's largest offset market-the Kyoto Protocol Clean Development Mechanism (CDM)-and finds an urgent need for reform. Well-designed offsets markets can play a role in engaging developing countries and encouraging sound investment in low-cost strategies for controlling emissions. However, in practice, much of the current CDM market does not reflect actual reductions in emissions, and that trend is poised to get worse.

Sadly, California's administration is proposing--right now--that we buy into this failed system for our effort to reduce greenhouse gases.

And it is not just the polluting companies we have to worry about. We also have to worry about the market traders—the ones who create the financial instruments that fuel the secondary trading market. In the EU-ETS reporters have discovered abuse of the system from the beginning and reported, for example, “Factories in China and carbon traders are exploiting a loophole in climate change regulations that allows them to make big profits from greenhouse gas emissions trading.”

Yes, factories and carbon traders.

The Los Angeles Times raised this issue in a May 2008 editorial, writing:

Also hoping to profit, honestly or not, would be carbon traders. Large financial institutions would jump into the exchange to collect commissions on carbon trades, just as they do with crude oil and wheat. This presents opportunities
for Enron-style market manipulation.

And the traders are lining up. Back in December 2006, months after the Governor signed California's Global Warming Solutions Act of 2006 (also known as AB 32) the New York Times reported:

"The U.S. market will be the mother lode of carbon trading, so we want to start getting up our brand now," said Marc Stuart, director of new business development at Ecosecurities. Ecosecurities, which has spent seven years investing in the reduction of greenhouse gases in Europe, is setting up a New York office to expand into the United States.

All this in the face of greenhouse gas emissions raising at a startling rate as reported in November 2007:

According to the U.N. panel of scientists, whose latest report is a synthesis of three previous ones, enough carbon dioxide already has built up that it imperils islands, coastlines and a fifth to two-thirds of the world's species.

As early as 2020, 75 million to 250 million people in Africa will suffer water shortages, residents of Asia's large cities will be at great risk of river and coastal flooding, according to the report.

Europeans can expect extensive species loss, and North Americans will experience longer and hotter heat waves and greater competition for water, says the report from the U.N. Intergovernmental Panel on Climate Change, which shared the Nobel Prize with Al Gore this year.

The panel portrays the Earth hurtling toward a warmer climate at a quickening pace and warns of inevitable human suffering. It says emissions of carbon, mainly from fossil fuels, must stabilize by 2015 and go down after that.

Cap and trade won’t work and “Free markets” ain’t free.

And maybe that is the broader lesson of the debacle: Don't rush into a market solution when there are serious questions about whether the market will work. Both economic analysis and British experience should have rung warning bells about California's deregulation scheme; but those warnings were ignored — just as similar warnings are being ignored by enthusiasts for market solutions for everything from prescription drug coverage to education.

So said economist and Op-Ed columnist Paul Krugeman in the New York Times on December 10, 2000, discussing California’s other failed “free market” experiment—electricity deregulation.

When will we learn?

Then it was just money— as the entire electricity system in California collapsed under the weight of the "free market."

Today it is just money—a proposed $700 billion in addition to the more than $300 billion we’ve already thrown into the current “free market” mortgage and banking meltdown.

Tomorrow, if we allow this “cap and trade” scheme to go forward, it won’t be money—it’ll be catastrophic climate collapse.

To learn more about our effort to implement true greenhouse gas emissions solutions in California, visit

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