Cap and Trade. Good, bad or ugly?

[KRonn]

This was, or should have been, big news last week. Passed the US House, barely. Faces an apparently bigger fight in the Senate. I've been following it some. Doing a google search shows lots of opinions, good and bad. What do we think about this deal? Is it Good, Bad or Ugly?


http://www.businessweek.com/magazine/content/09_11/b4123022554346.htm

[size] Obama's Cap-and-Trade Plan
The U.S. Chamber of Commerce is gearing up to rally coal-state politicians to alter the President's plan to control carbon emissions

By John Carey

As a candidate, Barack Obama said he'd tackle climate change by imposing caps on emissions of greenhouse gases. Now, as President, he's doing exactly that. He proposes reducing U.S. emissions 14% below 2005 levels by 2020 and 83% below by 2050. And he'd raise $646 billion from 2012 to 2019 by auctioning the rights to emit such gases—in effect putting a price on carbon emissions. With Congress also serious about the climate, business knows the battle has been joined for real and is trying to shape a compromise bill likely to emerge this year. "We are now playing with live bullets," says the Environmental Defense Fund's Mark Brownstein, who works with a group of companies that supports the plan.

The bullets are already flying—but mainly over details of the plan, not the general idea. While there are still fierce opponents of emissions limits, such as the U.S. Chamber of Commerce, much of business is supportive. The Obama Administration "is very close to right on the climate plan," says John W. Rowe, chief executive of Exelon (EXC), a Chicago-based utility.

In theory, a workable cap-and-trade market for carbon emissions would give business executives more certainty about future energy costs, helping them make better investment decisions. A market price on carbon would boost energy efficiency and renewable energy efforts, already beneficiaries in Obama's stimulus package. Nuclear power plants, such as Exelon's, would become more valuable. "I have great hope for the 'green' stimulus, but it won't fulfill its potential unless there is a price on carbon," says James E. Rogers, chief executive of Duke Energy (DUK). Also, there's little chance of getting China and India to agree to binding limits, which American companies insist is needed to keep the international playing field level, unless the U.S. takes action at home.

The real fight, therefore, is not whether to impose carbon limits but how to do so and at what cost to business. Obama proposes that companies buy an allowance, or permit, for each ton of carbon emitted, at an estimated cost, to start, of $13 to $20 per ton. (Those permits could also be bought and sold.) Even at the lower range of $13 per ton, energy companies and utilities would likely pass along the added cost to consumers. It's estimated the price of gasoline would go up by 12 cents a gallon and the average electricity bill by about 7% nationally—and far higher in states more dependent on coal. Unfair, say many executives. "It is a clear transfer of the middle part of the country's wealth to the two coasts," says Michael G. Morris, CEO of American Electric Power (AEP), a coal-heavy power generator based in Columbus, Ohio, that supplies electricity in 11 states.

Morris intends to target the 50 U.S. senators in the 25 coal-centric states "to see if we can bring some rationality to the program," he says. The U.S. Chamber of Commerce, meanwhile, plans to hold "climate dialogues" in as many as 16 cities, hammering home a similar message in coal-rich states with Democratic senators. The Obama plan "is now a very expensive tax used to transfer wealth. It has nothing to do with climate change," charges William L. Kovacs, a Chamber vice-president.

The Obama team points out that its cap-and-trade plan returns much of the money raised by permit sales to consumers nationwide in the form of lower taxes, so many people come out ahead. And the Environmental Defense Fund has created a map of 1,200 alternative energy or energy-efficiency companies in key manufacturing states that stand to benefit from the climate plan. While the Midwest will bear a higher cost from reducing carbon emissions, the region will also benefit from the most new jobs, the EDF argues.

Lots of other details remain to fight over. Dow Chemical (DOW) and others want credit for emission cuts they have already made, for example. So prepare for months of negotiations. But a deal is likely. Says Dow lobbyist Peter A. Molinaro: "Somewhere out there is a rational policy that could actually get the votes."

Carey is a senior correspondent for BusinessWeek in Washington.

[crazy canuck]

The stock market has no regulatory problems.  How could there ever be problems with this.  /end sarcasm.

[Faeelin]

I am sure Obama will respond to this challenge to a crucial piece of legislation with the fierce advocacy he has shown since his inauguration.

[DGuller]

Good if done properly.  Can be no so good if Obama continues his trend of compromising by adopting insanity from both sides.  Will never be nearly as bad as the right wing idiots claim it is.

[jimmy olsen]

I am sure Obama will respond to this challenge to a crucial piece of legislation with the fierce advocacy he has shown since his inauguration.

Ouch :pinchL

[derspiess]

Both Bad and Ugly.

[grumbler]

I don't see any better solution on the horizon.  The alternative is a directed reduction with about one bazillion loopholes, each paid for with a campaign donation.

[grumbler]

Both Bad and Ugly.

If Spicy is against it, surely it is worth trying? 

[Neil]

Wouldn't it make more sense to destory all our technology and live as savages?

[jimmy olsen]

Wouldn't it make more sense to destory all our technology and live as savages?

The Battlestar Gallictica solution!

[saskganesh]

Canada has their own cap and trade in the works. regulations have been published, comment period is now open, and will be extended until we get a better read on the US positions. the goal is to harmonise as much as possible, and create a NA market.

Grist.org has had the best ongoing coverage of the congressional cap and trade dance btw

I am rather optimistic  as a year ago, this was not on the legislative radar in either country so it seems to have momentum. Pricing pollution is an excellent idea. I think the danger is to give away too many credits for free, which would essentially reward polluters for past behaviour.

the second danger lies in maintaining the value of credits. like, if I plant 100 hectares of trees tomorrow, I'll eventually get credits because my forest is a carbon sink, which I then sell on the market to some rich polluter , but say in 16-20 years I harvest those trees because they are fast growing hybrids and I want to cash out, and I reintroduce the CO2 I sequestered back in the atmosphere, what happens to the credits I generated 16-20 years ago? do they still exist or has their value changed? and would whoever owns those credits now know about it? the room for corruption makes my head hurt.

now, a carbon flat tax would avoid the complexities of a cap and trade system, and take immediate effect. we would pay for pollution, pound for pound, every single day we bought or consumed something.

[crazy canuck]

the room for corruption makes my head hurt.

Exactly.  We have a hard enough creating a system that trades something that is real nevermind creating a system that trades something completely notional.  Forget the old saying "I have a bridge to sell you."  I now have some carbon credits to sell you.

About 20 years ago the Canadian government had a tax credit system for companies conducting scientific research.  The program had to be stopped because corruption and fraud was rampant.  People were setting up companies just to claim the tax credits without ever conducting any research.  I remember reading that the vast majority of companies claiming the credits were entirely fraudulent.  I can see a similar thing happening here.

[DGuller]

the second danger lies in maintaining the value of credits. like, if I plant 100 hectares of trees tomorrow, I'll eventually get credits because my forest is a carbon sink, which I then sell on the market to some rich polluter , but say in 16-20 years I harvest those trees because they are fast growing hybrids and I want to cash out, and I reintroduce the CO2 I sequestered back in the atmosphere, what happens to the credits I generated 16-20 years ago? do they still exist or has their value changed? and would whoever owns those credits now know about it? the room for corruption makes my head hurt.

Wouldn't you have to buy credits to cut down those trees?

[lustindarkness]

If they really believed carbon emmisions are so bad for us they would outlaw them completely, not make a market for selling permits to pollute. Don't know, seems like more feelgoodism to make it look like they care for the enviroment while making money out of it.

[saskganesh]

the second danger lies in maintaining the value of credits. like, if I plant 100 hectares of trees tomorrow, I'll eventually get credits because my forest is a carbon sink, which I then sell on the market to some rich polluter , but say in 16-20 years I harvest those trees because they are fast growing hybrids and I want to cash out, and I reintroduce the CO2 I sequestered back in the atmosphere, what happens to the credits I generated 16-20 years ago? do they still exist or has their value changed? and would whoever owns those credits now know about it? the room for corruption makes my head hurt.

Wouldn't you have to buy credits to cut down those trees?

good point.

ok, supposed my trees are flattened by a tornado and the carcasses are devoured by mutant Korean pine beetles. same end result. do I have to buy insurance, or does that come bundled with the original credits and is transferred with the sale. and what kind of verification trace scheme will be in place to trace destruction of forests in one place to a smug credit holder in another?