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Cap & Trade for CO2: Great Solution or Not?

| Tuesday January 12th, 2010 | 9 Comments

Annie Leonard’s Story of Cap & Trade, which we wrote about a while back, throws a critical and generally dismissive eye on the concept of a cap & trade solution for carbon emissions. The film argues that such a solution is at best a distraction from real cuts in fossil fuel use, and at worst a crony-capitalist scam that ends up rewarding the worst polluters and doing little to change the fossil fuel basis of our economy.

However, many commenters on that post, including myself, found the film to be a disappointment which “threw the baby out with the bathwater.” Cap & trade, as currently written, is not flawless, but most of the film’s critiques were about enforcement and the distribution of CO2 credits, not about faulting the basic principal of trading credits. Worldchanging even outlined a full catalog of errors in the film.

While in Business School at Presidio, I came to be generally in favor cap & trade as an ideal way to work inside the existing economic system – rewarding well-performing companies according to the invisible hand of the market and imposing higher costs on those who fail to curb pollution. Of course, many catches remain: Who gets to set the bar? How are initial credits distributed? Who sets the plan for lowering the bar? And so on… dare I mention the complexity of dealing with many countries and their myriad laws and levels of economic development?

Needless to say, in the wake of Copenhagen, I thought a little more depth was needed. Got an hour? Great. Have a listen to Renewable Energy World’s excellent 60 minute podcast about “The Real Story of Cap and Trade.” Don’t have an hour? Why not bookmark this page and come back a little later. The podcast is a rock solid explanation of the cap & trade system from a variety of sources. I’d love to hear your thoughts…

For those with short attention spans, the podcast features points of views from the following folks, and yes, is generally in favor of the Cap & Trade concept:

Seth Kaplan, vice president for climate advocacy at the Conservation Law Foundation, describes the history of cap and trade as it rapidly evolved from an academic proposal to an international policy for limiting greenhouse gas emissions.

Phil Adams, president and chief operating officer of World Energy Solutions, talks about the differences between the primary and secondary carbon trading markets. He’ll also talk about how his company’s carbon exchange, the World Green Exchange, works as a driver for those markets.

Tim Healy, CEO and chairman of EnerNOC, tells us how he’s built a business around using less energy, not more. He’ll also talk about the company’s new CarbonTrak software and how it can help businesses realize the financial value in reducing emissions.

Milo Sjardin, head of U.S. carbon markets for New Energy Finance, compares the size and scope of the EU and U.S. carbon trading programs.

Erin Craig, CEO of TerraPass, describes the make-up of the “pure” voluntary market in the U.S. and how it may blend together with a compliance market in the future.

Michelle Chan, senior policy analyst with Friends of the Earth, warns about the potential downside risk in creating new derivative markets based on carbon. She talks about how investors could be creating “subprime carbon,” as they devise new financial products based upon bad offset projects.

And Peter Fusaro, chairman and founder of Global Change Associates, talks about how carbon markets will be regulated in the U.S. He’ll also discuss how Americans can learn from the European experience with cap and trade.

What do you think?


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  1. January 12, 2010 at 10:01 am PDT | Ashwin Seshagiri writes:

    The Trading Places image is absolutely perfect!

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  2. January 12, 2010 at 18:49 pm PDT | Patrick Bond writes:

    Nick, this is very telling. After trashing The Story of Cap and Trade (which I served as a volunteer advisor), here you list what you understand as 'catches' in what, otherwise, you claim is “an ideal way to work inside the existing economic system – rewarding well-performing companies according to the invisible hand of the market and imposing higher costs on those who fail to curb pollution. Of course, many catches remain: Who gets to set the bar? How are initial credits distributed? Who sets the plan for lowering the bar? And so on… dare I mention the complexity of dealing with many countries and their myriad laws and levels of economic development?”

    Nick, did you watch The Story of Cap and Trade?

    Did you notice that it referred to periodic market crashes? Did you study financial markets in b-school, and what did you learn about volatility and speculation?

    And did you learn anything about systematic corruption that has destroyed the EU ETS credibility, with 90% of trades in some EU countries fraudulent, according to Europol last month? Do you know how thoroughly unreliable verification is for Third World CDM projects (leading to the UN ditching its main consultancy last September)?

    Finally, did you pick up how cap and trade is not a solution but a distraction? How it's not going to happen in any case given Copenhagen and US Senate gridlock? How the price – now at around 13 euros – won't buy renewable energy investments, and how it's not going to reach 20 euros by 2020?

    In short, have you been paying attention to the actual operation of carbon markets?

    Not addressing these 'catches' may allow you to stay in your comfort zone, but what use is a media communicator if you can't grapple with the tough questions? (Unless you want more Citibank work, in which case deflecting and distracting may serve you better, indeed.)

    Cheers,
    Patrick

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    • January 13, 2010 at 6:45 am PDT | Stephen Lacey writes:

      Patrick — I think you've mis-characterized Nick's comments. I think he actually agreed with a lot of what the film outlined, but instead disagreed with how the film put those messages together. (Nick, I don't want to put words into your mouth).

      I also believe that the film brings up a lot of important points. However, with little context to any of the points it lays out, the film opens itself up to all kinds of criticism. Rather than attack people for disagreeing with you, maybe you should think about creating a film that outlines in a comprehensive, systematic way the problems that you see?

      While I tend to agree with many of the points you bring up, I think the film is unhelpful to the debate. It does little to educate people, and a lot to scare people. That, in my opinion, is no better than the extreme right-wing conservatives who call climate change and carbon-reduction programs “hoaxes,” without any good points to back them up.

      Anyway, I sincerely appreciate and respect your efforts to tell people about why you think cap and trade is wrong. But I think we should be making better efforts to inform people. And by engaging in ideologically-tinged debates, we turn people off.

      (But what do I know, the video has people talking…)

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  3. January 12, 2010 at 19:18 pm PDT | nickaster writes:

    But Patrick, I AM calling to address those “catches”. I'm not blindly supporting Cap & Trade, but I am intrigued by it and I don't think it's something to cynically dismiss despite it faults and complications.

    I invite constructive dialogue on this – my beef with the film was that it seemed to be a classic “we can't trust those evil capitalists” argument without offering much that sounded better. Yes, it calls for “Solid Caps, Strong Laws, Citizen Action, and Carbon Fees” – that all sounds great. I don't think anyone reading this would oppose such things, but how do any of those things get around the same “catches”?

    What's your reaction to the criticism of Grist, WorldChanging and other very reputable sources who have been far harsher than me on this film? And yes, I've watched it many times – see the post linked to at the top.

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  4. January 13, 2010 at 7:20 am PDT | Nick Palmer writes:

    I am a great fan of “The Story of Stuff” and have linked to it several times, on my sustainability blog, to enhance a point I was making. The film was clear and made extremely good points. It deservedly became very popular.

    I did not like the “Story of Cap and Trade”. It seemed as if Annie was letting an ideology blind her to the potentially overwhelming usefulness of the concept – the baby was thrown out with the bathwater – worse, she constantly suggested that either there was no baby or it would grow up to be an evil adult.

    Her point about how unregulated markets have forced us towards our current dire predicament is, of course, accurate. She goes from this point, in a pseudo-logical fashion rather like this: markets have brought us to this point – this point is bad – therefore any further market based solution will also be bad – therefore she must then exploit the credibility and warm fuzzy feelings that people remember from “Story of Stuff” to show them that market based “cap and trade” will inevitably be a bad thing.

    The problem with markets (up to date) is that their bottom line only contains measurements of money in versus money out and unfortunately the processes that make the money do not take “externalities” into account such as carbon emissions, volume of waste generated, general non-sustainable damage to the environment, reduction in bio-diversity, public health, social well being etc. etc.

    The damage that economic activity/growth inflicts on these “externalities” can be (if we're lucky) controlled and moderated by legislation and voluntary codes of practice but the problems are systemic and huge and legislation is a very slow and blunt weapon – sadly, the legislators also tend to be high up members of the same society, with the same set of values, that created the situation in the first place by not valuing the environment or social values enough. Expecting them to lift themselves up by their own bootstraps (by re-evaluating everything that is familiar and comfortable to them) is optimistic to say the least.

    Concerted campaigning and citizen action can generate enough pressure to compel some companies to adopt a greener, more sustainable, outlook but it's not enough. The company that continues to maintain a cavalier approach will mostly tend to be more profitable; that is the problem with markets-to-date. Putting the full costs, financial, environmental and social onto the accountants' bottom line will have an extremely powerful, almost automatic, effect that will drive companies and economies to “do the right thing” because, if they don't, they will become less profitable or go out of business altogether.

    Markets have historically been bad for sustainable ways. Putting a cost/value on carbon emissions (and all the other externalities too – but that's for later…) that will direct greedy people to be keen to take the green option – purely to save money – will be a great start – it may just solve the whole shooting match.

    Annie's basic premise is to suggest that any market will end up being totally corrupt. Well, it's up to us to keep them straight – she can't just point to teething problems or far-fetched theoretical dangers to reject the whole idea. The bad possibilities she enumerates are there because we have had a whole generation of enthusiastic “yuppies”, with their selfish short term outlook, driving the market mechanisms to Madoff like breaking points. It was in their financial (short to medium term) interests to do so! Change the financial interests of people like that – make it (not) so!

    Monetise the externalities – put considerate, wise, prudent, sensible environmentally and socially sound economic drivers onto the bottom line and watch society transform itself far faster and more efficiently than even the most draconian legislation could do. Watch people's personalities and the world zeitgeist change too.

    Nothing big ever worked right first time – it will take a lot of effort, tuning and tweaking and monitoring to hack it into shape but imagining that markets, that were predisposed to generate corrupt selfish greedy types, who don't care about anything apart from their own “bottom line”, must always do that is truly throwing the fantastic baby out with the murky water.

    A market which uses full cost (or ecological or environmental) accounting would be transformative and constructive, not destructive. It all depends what you measure when you tot up the bottom line. Make the bad guys, environmentally and socially, less profitable. Make the good guys more profitable. Make it so!

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  5. January 13, 2010 at 21:25 pm PDT | Patrick Bond writes:

    On prior crits of http://www.thestoryofcapandtrade.org see http://www.counterpunch.org/bond12172009.html

    On this point – “The problem with markets (up to date) is that their bottom line only contains measurements of money in versus money out…” – you seem to have missed the lesson of the 2008 crash: financial markets become sites of speculative activity and are hence too turbulent, fickle, unreliable and biased to those who already have financial power, for us to dare gamble with the planet's future.

    Cheers,
    Patrick

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    • January 14, 2010 at 3:50 am PDT | Nick Palmer writes:

      Patrick – of course you are correct, however, as it's a big topic I just left out that second and third order derivatives type speculation, which inevitably leads to exponentially expanding speculative bubbles (and insane and unjust rewards for the perpetrators) would and should be heavily governed (in the sense that governing means controlling the speed of something happening) by such things as the Tobin transaction tax which would hopefully remove a lot of the incentive to trade and re-trade exotic financial instruments at the speed of light.

      Governments and classical economists are looking at regulating the “simple” market right now to stabilise it and prevent speculative bubbles like the last one happening again. Even the wing nuts realise that “too big to fail” organisations need to be prevented from getting that big…

      I can't prove it here (because I just thought of it!) but I suspect a future ecolo/economy which would use many or complex ways of measuring wealth and well being would be inherently more stable and resistant to speculative forces by virtue of its having the equivalent of extensive biodiversity. An economy of small to medium size organisations is far more stable than one of a few giants – I think the parallel here between ecology and economy is striking and it hints that the physical and mathematical laws and drivers are the same for both

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  6. January 14, 2010 at 5:25 am PDT | Patrick Bond writes:

    On prior crits of http://www.thestoryofcapandtrade.org see http://www.counterpunch.org/bond12172009.html

    On this point – “The problem with markets (up to date) is that their bottom line only contains measurements of money in versus money out…” – you seem to have missed the lesson of the 2008 crash: financial markets become sites of speculative activity and are hence too turbulent, fickle, unreliable and biased to those who already have financial power, for us to dare gamble with the planet's future.

    Cheers,
    Patrick

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  7. January 14, 2010 at 11:50 am PDT | Nick Palmer writes:

    Patrick – of course you are correct, however, as it's a big topic I just left out that second and third order derivatives type speculation, which inevitably leads to exponentially expanding speculative bubbles (and insane and unjust rewards for the perpetrators) would and should be heavily governed (in the sense that governing means controlling the speed of something happening) by such things as the Tobin transaction tax which would hopefully remove a lot of the incentive to trade and re-trade exotic financial instruments at the speed of light.

    Governments and classical economists are looking at regulating the “simple” market right now to stabilise it and prevent speculative bubbles like the last one happening again. Even the wing nuts realise that “too big to fail” organisations need to be prevented from getting that big…

    I can't prove it here (because I just thought of it!) but I suspect a future ecolo/economy which would use many or complex ways of measuring wealth and well being would be inherently more stable and resistant to speculative forces by virtue of its having the equivalent of extensive biodiversity. An economy of small to medium size organisations is far more stable than one of a few giants – I think the parallel here between ecology and economy is striking and it hints that the physical and mathematical laws and drivers are the same for both.

    As far as a simple carbon tax goes, I think one flaw is that I suspect big organisations would look at “operating” in some offshore Island (I Iive in Jersey and they would, no doubt, like to take this business) to avoid paying the carbon tax. No doubt there would be financial shenanigans with a cap and trade too but we've got to do something quick and I think it is a dangerous waste of time trying to work out a perfect system before starting. Get on with something big, quick, and tune it and tweak it on the fly afterwards. I think in the various situations in which we find ourselves – climate change, peak everything, global population and financial meltdown (and unhappiness) it is a time for flying by the seat of our pants a little.

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