Cap and Trade. Good, bad or ugly?

[Admiral Yi]

I'm not terribly enamored of initiatives with end dates after the proposer leaves office.

[crazy canuck]

I'm not terribly enamored of initiatives with end dates after the proposer leaves office.

The biggest problem with politics (and business in general) is the disincentive to produce policies the provide long term gains.  Showing short term gain is all important despite the long term implications.

[grumbler]

I dont think that is a good comparison.  The reason why a buyer of currency credits worries about whether it is not fraudulent is because the buyer will in turn want to trade them along in some form.  In the case of carbon credits the buyer doesnt care.  He is not going to try to convince another buyer to take them.  He is going to use them against his own pollution.  All he cares about is whether the government regulator will accept them which brings me back to the huge problems encountered with the research tax credits.

Well, he has to worry about whether the government will accept them, as well as whether or not anyone else will accept them if the buyer over-purchases and wants to sell any excess.  That brings us back to the huge problem of fraud, whether tax fraud (as in your examle) or other kinds of fraud (as in mine).

Whether we are talking about taxation or cap and trade it all comes down the a government regulator ensuring that the process is not abused.  In the case of Cap and Trade there is a lot of room for abuse and indeed if a buyer can get cut rate credits some a fraudulent source the potential for abuse is significant.

Agred that regulators need to regulate, whether the system is a taxation issue as in your example, or a "commodity" system.  I don't see this as an argument for or against either system.

[crazy canuck]

Agreed that regulators need to regulate, whether the system is a taxation issue as in your example, or a "commodity" system.  I don't see this as an argument for or against either system.

I agree with that.  It is an argument against using both systems though.

In addition to the problem of fraud we are discussing AR makes a good point about the effect of making carbon more expensive in North America.  The whole logic of such a system of artificially creating incentives to innovate would be lost if rather then innovate companies could simply re-locate to avoid that the artificially imposed carbon cost.

[DGuller]

I agree with that.  It is an argument against using both systems though.

It's hard to regulate pollution without regulations and regulators.

[grumbler]

In addition to the problem of fraud we are discussing AR makes a good point about the effect of making carbon more expensive in North America.  The whole logic of such a system of artificially creating incentives to innovate would be lost if rather then innovate companies could simply re-locate to avoid that the artificially imposed carbon cost.

True enough, but equally true of all systems that impose limits on commercial activity for perceived social gains.  Labor laws increase the cost of labor and therefor drive jobs overseas.  Shipping safety laws increase the cost of shipping and therefor drive some shipping to using other ports and flags.

This is no different.  It is a benefit that comes at a cost.  I'd rather see money going into this than $75,000-a-year dog catchers in NY State, though.

[alfred russel]

True enough, but equally true of all systems that impose limits on commercial activity for perceived social gains.  Labor laws increase the cost of labor and therefor drive jobs overseas.  Shipping safety laws increase the cost of shipping and therefor drive some shipping to using other ports and flags.

This is no different.  It is a benefit that comes at a cost.  I'd rather see money going into this than $75,000-a-year dog catchers in NY State, though.

The problem I see with cap and trade is that there are potentially no benefits at all. Manmade global warming is the effect of the cumulative greenhouse gases that have been released from fossil fuels since the beginning of the industrial revolution, so even if there are modest unilateral reductions in the US level of consumption that aren't offset by increases elsewhere I do not see much hope for a significant change.

But then assuming that US reductions are not offset by increases elsewhere is almost certainly false. The high level of the cost of oil in the middle of a major economic downturn should be a flashing neon sign that the historic balance of supply and demand is now tilted toward excess demand. There isn't any secret where that demand is coming from: countries such as China and India. Even if production of goods and services isn't outsourced to those countries because of cap and trade, why won't they will take advantage of a reduction in fossil fuel demand in the US to purchase more themselves (at the resulting lower cost)?

We essentially have two methods to reduce greenhouse gas emissions: reducing the supply of fossil fuels, or reducing the demand. Without question the approach that would be easier from a regulatory perspective would be to reduce the supply. That solution isn't even on the table, because everyone knows that going to Saudi Arabia and asking them to leave half of their oil fields untouched is not going anywhere. There isn't even the political will to bring up telling West Virginia that it can only produce 1/2 the coal it currently does. But the idea that we are going to back into that type of supply reduction by unilaterally implementing a byzantine regulatory regime on the demand side seems insane to me.

[ulmont]

There isn't any secret where that demand is coming from: countries such as China and India. Even if production of goods and services isn't outsourced to those countries because of cap and trade, why won't they will take advantage of a reduction in fossil fuel demand in the US to purchase more themselves (at the resulting lower cost)?

China is trying at least as hard as we are to get out of the carbon business, at least if news reports can be believed.

[grumbler]

The problem I see with cap and trade is that there are potentially no benefits at all. (snip)

That is true of all public policy initiatives, including those I used in my examples which you quoted.

If oe wants to argue for a "do nothing about the causes and just try to kitigate the effects" approach, that is certainly logically viable (The Economist took that position some years ago).

However, if one is going to do something, cap and trade seems to me to make the most sense.

[Neil]

We essentially have two methods to reduce greenhouse gas emissions: reducing the supply of fossil fuels, or reducing the demand. Without question the approach that would be easier from a regulatory perspective would be to reduce the supply. That solution isn't even on the table, because everyone knows that going to Saudi Arabia and asking them to leave half of their oil fields untouched is not going anywhere. There isn't even the political will to bring up telling West Virginia that it can only produce 1/2 the coal it currently does. But the idea that we are going to back into that type of supply reduction by unilaterally implementing a byzantine regulatory regime on the demand side seems insane to me.

It seems to me that the argument is usually that it's up to the civilized world to suck it up and develop new technologies, something that we won't do unless some sort of a regulatory regime is in place to impose the need.  Once the technologies exist, they can be forced on the rest of the world.

[Barrister]

If oe wants to argue for a "do nothing about the causes and just try to kitigate the effects" approach, that is certainly logically viable (The Economist took that position some years ago).

Interesting article in this month's Atlantic that states that mitigating the effects of global greenhouse gases through "geo-engineering" is potentially orders of magnitude cheaper than reducing the output of such gases.  The article doesn't ultimately recommend pursuing such technologies, but it's still a quite interesting read.

I should have remembered to look online:

http://www.theatlantic.com/doc/200907/climate-engineering

[crazy canuck]

The problem I see with cap and trade is that there are potentially no benefits at all. (snip)

That is true of all public policy initiatives, including those I used in my examples which you quoted.

I dont think that is true.  One of the policy areas you cited was labour laws.  While they do increase costs they are also effective at achieving the standards they attempt to enforce.  The reason for that is the system is a complaint driven process.  The government does not have to expend resources to hunt down where violations of labour laws might be occuring.  They count on the employees to do that.

The situation is quite different in a cap and trade system where there is no obvious person who will complain to ensure the carbon credits being sold are legitimate.  Its all really just a paper transaction with no assets to back it up.

I know your point is the same thing exists with currency trades but as we discussed the difference with a currency trade is that there are a web of people involved that need to have confidence in the currency being traded.  For this to work carbon would have to be commodified in the same way as currency in order to be tradeable but carbon is only being used as a set off in this scheme not as a commodity which will continue to be traded.

A carbon tax on ther hand can be very simple and easy to administer.  Take for example the tax we have here in B.C.   A percentage is added to the cost to the buyer of fossil fuels (mainly at the gas pump).  Straight forward, direct and impossible to evade.

[alfred russel]

The problem I see with cap and trade is that there are potentially no benefits at all. (snip)

That is true of all public policy initiatives, including those I used in my examples which you quoted.

If oe wants to argue for a "do nothing about the causes and just try to kitigate the effects" approach, that is certainly logically viable (The Economist took that position some years ago).

However, if one is going to do something, cap and trade seems to me to make the most sense.

It makes the most sense? To me, it makes almost the least. Under a system that you give away permits to incumbent companies and have border adjustments, which seems to be where we are headed, you are going to have a system ripe for political distortions virtually everywhere. First, it is anti-competitive: imagine I want to set up a chemical company to compete against yours, you have been given carbon offsets that I must buy. The effect is that I have another set of costs to set up my business, and in this case the costs will actually go to subsidize my competition. Second, the border adjustments are rife for political influence and arbitrary rulings. Determining the carbon inherent in a good coming into the country is not feasible: are you going to investigate whether that shoe shipment from China is from a coal burning region or a location supplied with electricity from the Three Gorges Dam? Or are we going to waive the detailed analysis, and use general rules--such as Nike lobbies that so that we assume shoes come in from low carbon regions, while Ford and GM lobbies that any future Chinese car imports come from high carbon regions?

A few ideas that make more sense from my point of view: a carbon tax (you will still have the border adjustment problems, but at least it won't have the anti-competitive issues), a major research initiative along the lines of NASA, a vigorous assessment of how to prepare our cities for the global warming we will probably be unable to prevent, or a serious conservation effort (the only way I can think of doing this would be to have a national nuclear power program plus a much higher gasoline tax).

[Faeelin]

But then assuming that US reductions are not offset by increases elsewhere is almost certainly false. The high level of the cost of oil in the middle of a major economic downturn should be a flashing neon sign that the historic balance of supply and demand is now tilted toward excess demand. There isn't any secret where that demand is coming from: countries such as China and India. Even if production of goods and services isn't outsourced to those countries because of cap and trade, why won't they will take advantage of a reduction in fossil fuel demand in the US to purchase more themselves (at the resulting lower cost)?

Doesn't this assume that China and India's leaders are just as shortsighted as America's? I find that hard to believe.

[alfred russel]

There isn't any secret where that demand is coming from: countries such as China and India. Even if production of goods and services isn't outsourced to those countries because of cap and trade, why won't they will take advantage of a reduction in fossil fuel demand in the US to purchase more themselves (at the resulting lower cost)?

China is trying at least as hard as we are to get out of the carbon business, at least if news reports can be believed.

And yet they keep investing more and more in coal. It isn't the case that China and India are evil countries that want to ruin the planet (or that they don't care). But take our current cap and trade bill--when it was estimated that it would cost around $150-$200 a household, the assumption was that was less than expected and not too bad. But try justifying that in a third world country where that is a sizable portion of the household income for a lot of families. There is no way the country's leadership is going to put that big of a burden on its population.