What's Cap and Trade?

Somebody asked me, since I was in the oil business for four decades, to explain this cap and trade business for reducing global warming emissions.

As a sensible plan, cap and trade ranks a little worse than the Pope selling dispensations for sin.


Cap and trade says that if you increase your emissions (say, for a new manufacturing investment that will create jobs) then you pay a fine to the government. That's the cap part. OR you can pay money to somebody who has reduced their emissions. For their reductions, they have the right to make an increase without paying a fine, and they sign over this right to you. You show the authorities that the other guy made a reduction that offsets your increase, and you can go ahead with your investment/increase without paying the fine. If you pay less for the offset rights than you would for the fine, then that's to your advantage. That's the trade part -- you're trading their reduction for your increase, and total emissions stay the same.

There will probably be a market for offsets -- for example, you could buy for $100 the right to increase emissions by 10 pounds per year. You wouldn't actually pay any particular person who made reductions, any more than you pay an individual to buy shares in the stock market. And if you reduce by 10 pounds a year, you can sell that in the market for $100. If the government wants to reduce emissions instead of holding even, then they can say that reducing by 1o pounds a year only lets you sell offset rights for 8 pounds a year.

Cap and trades have already been used, for example to reduce smog-related emissions in some cities. The benefits are:

1) An incentive for people to voluntarily make emission reductions that cost the least to achieve, and then make a profit by selling the rights. This is better than "command and control" reductions which require one guy to spend a huge wad for a very small reduction, while the guy down the road, who could get ten times the benefit for that money, spends only a little money and leaves all those cheap reductions unachieved.
2) If are you plan to make an increase, you have an incentive to make reductions for several years in advance to keep your total the same and avoid any fines. This means you will go look for reduction opportunities that you otherwise wouldn't care about.


So what's not to like?


1) All this requires a massive swapping of money which must be carried out by a massive new bureaucracy
2) It requires a massive number of government regulators to make sure that all the massive reductions claimed were actually made.
2) The price of offsets goes up and down, so somebody contemplating spending money to reduce emissions can't be sure of recovering their costs.
3) Most of the reductions would have taken place for some other reason than cap and trade. For example, if you put in a more efficient home heater it will reduce emissions but you did it to reduce your fuel bill , not because you could make money from cap and trade. Imagine all those money losing plants that GM is shutting down. GM would be able to sell those reductions to offset increases, which allows somebody else to increase their emissions and "use up" the offsets that the GM plants are no longer emitting.
4) There are lot of lawsuits about how to interpret the rules. For example, should you be able to sell offsets by comparing the emissions from your new heater to those from your old heater when it was new? Or by comparing the emissions from your new heater to those from your old heater when you replaced the old, rusted, clogged shadow of it's former self that it had become by the time you ditched it. If the latter argument prevails you get to sell two or three times as much offset as the other way. The regulators, on the other hand, see this as allowing two or three times as much increase from somebody else. So there will be a lawsuit to decide how much offset you can sell. Multiply that by approximately one jillion. And for all this cap and trade has not caused any reduction, the whole argument is about how much we can add while pretending we aren't.


So the net effects are:
a) GM gets some money, which probably goes to upper management as bonuses
b) The economy loses the same number of auto workers as it would have anyway.
c) The economy gains (if that's the word) financial bureaucrats and government regulators.
d) Emissions stay the same as they were before.
e) The lawyers make money. Which is the only universal principle in modern American society.