Good and Bad Things about Cap and Trade

One might be able to get away with saying that a cap-and-trade system for emissions reduction is a market solution. It is by no means a free market solution.

I found one good thing about the system from the Chicago Climate Exchange web site. They sell their contracts in metric tons of greenhouse gases that are sequestered or destroyed. Tying money to a physical quantity, rather than a “credit,” is a good thing; otherwise one could change what the “credit” is and really abuse benevolent people.

But there is a severe market distortion: Instead of an independent authority that would stake its reputation in deciding what benefit to the environment results from a certain amount of eliminated gases, and then that authority would issue ratings of environmental stewardship, the government is called in to set emission caps. Caps are used to force companies to buy credits and buff up green companies.

The effects of this kind of government distortion are visible in the financial markets, where banks were coerced into creating loans they wouldn’t have made in the first place. In the environmental market, no homes would be bought by the government, but you can count on a lot of wasteful spending.

The Washington Post reported Tuesday that 10 Northeast states banded together to create a regional cap-and trade system. $40 million dollars in allowances were purchased by (coerced from?) power generation companies. The system has one redeeming quality: it isn’t federally mandated.  Someone took the 9^th and 10^th Amendments seriously. Doing things regionally also gives us the ability to see how a system affects a region without harming everyone else, and maybe someone else will figure out how to do it better.

Note in the Post article, someone has decided that not enough is being done:

Critics have said the program will not have an immediate or national effect, because the emissions cap is set too high — at 188 million tons annually, slightly higher than the current level — and the prices are low enough for utilities to pay the fees and continue to pollute.

Now, this is interesting. The intent is to force companies not to pollute at all. It isn’t enough that they pollute and purchase enough remediation. Are the critics telling us that remediation doesn’t really work? If “purchased” metric tons of sequestered/destroyed greenhouse gases do not counter actual emitted greenhouse gases, the market is broken.

The Washington Times posted an article on Saturday about the House of Representatives’ experience with the carbon offset market. The House calculated that they needed to buy 30,000 short tons of carbon offsets, but they bought 30,000 metric tons, overspending by $25,000. Rather than get a refund, the Chicago Climate Exchange will hold our tax dollars and apply them to future spending.

The GAO is asking the same type of questions posed above about the credibility of the carbon trading system, leading to this quip:

“Without proper assurances, the only thing we know carbon-offset purchases reduce are taxpayer dollars,” said Rep. Darrell Issa, California Republican and ranking member of the House Oversight and Government Reform subcommittee on domestic policy.

Pelosi’s swamp deepens…

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