To Trade Or Not To Trade
By Matson Boyd
Pick up a newspaper, ask a member of congress, or worse yet, ask someone on Wall Street, and you’ll hear that the way to stop climate change is to pass cap-and-trade— put a price on carbon and let Wall Street trade in the carbon permits. This understandably has many folks concerned that we’re going to commodify our atmosphere and open the door to Wall Street shenanigans. Our recent history of bubbles and fraud suggests there’s some reason to worry about what Wall Street will do as we tackle climate change. But on closer inspection, capping carbon doesn’t require trading carbon. And the loopholes and fraud that have plagued carbon trading schemes stem from “offsets”, which are not needed at all. So which systems of carbon regulation are vulnerable to Wall Street trickery, and which are resistant to it?
First, Cap and Trade involves trading of carbon permits. It’s so important to marketing the system that it’s in the name. The idea is to put market forces to work to stop climate change. The magic of trade will fix it! Capitalism is great! Cap and trade has been getting all the attention over the years, including several major pushes in Congress, for example the famously labyrinthine Kerry-Boxer bill. And while the cap part is great, the trade part isn’t necessary or helpful at all.
Cap and Dividend is not cap and trade. Both systems start by auctioning carbon permits, but that’s the end of the similarity. I asked Jim Boyce about this (Jim is a CPE economist and a key figure helping to develop cap and dividend). He said, “if permits are auctioned, there is no need for the permits to be tradeable, and therefore no scope for market manipulation or speculation.” The auctioning process is very simple. Boyce mentioned that the Northeast states already have the Regional Greenhouse Gas Initiative, where carbon permits are auctioned off to power companies every few months.
The biggest difference between the two policies is the dividend part. Capping carbon raises the price of energy for all of us, rich and poor alike. Cap and trade policies typically use the extra expense as government revenue, and lower income taxes in turn. (This is called the “green shift”). But since the poor will spend more on energy than they typically pay in income taxes, the green shift effectively raises taxes on the poor. Cap and dividend does the opposite: it rebates the money from carbon auctions to all of us on an even basis, and since the rich emit more carbon than the poor, cap and dividend actually increases incomes for the poor by thousands of dollars per person.
No matter the carbon policy, financial markets can already make bets on the prices of carbon, just as much as they can bet on the weather or anything else. These bets are some of the most common types of derivatives. And since loosely regulated derivatives were a major ingredient in the crisis of 2008, it’s natural to worry about what will happen with carbon. Derivatives need to be closely regulated, but that’s a matter for financial regulators, not climate economists.
“Offsets” are actually a matter for climate economists, and they tend to cause a lot of problems. An offset is when a company, say a German electric company, emits more carbon than they’d otherwise be allowed, and “offsets” this by paying someone, say a Sudanese forester, to grow more trees and thus take more carbon out of the atmosphere. The increased carbon in the forest offsets the extra factory pollution. So what’s the problem? How do we know the trees wouldn’t be left to grow anyways? And how can the inspectors possibly verify the carbon sequestration? And there remain major uncertainties about which types of forests actually reduce the amount of greenhouse gas in the atmosphere, and to what degree. To make matters worse, we have to be very careful about the timing of our carbon emissions. We’re already extremely over-budget, and we can’t add emissions now with the promise that trees will grow decades later, not if the earth bakes in between. The solution is very simple. Don’t do offsets. Offsets don’t help us reduce carbon emissions and actually tend to cause leaks in the carbon cap.
In sum, we can avoid the perils of financial speculation and fraud if we just say no to offsets and trading schemes. According to Jim Boyce, a routine auction of carbon permits is all we need. “We can put a price on carbon without turning the right to emit carbon into a commodity.” Cap and dividend is one way to do that, and did I mention it raises incomes for the poor?
The Center for Popular Economics is a collective of economists who work to demystify the economy and build economies for people – not profit. This year, our summer institute – Capitalism and Climate Change – will focus on the systemic roots of climate change from within capitalism, and what we can do about it. You can get involved by attending, funding a scholarship, or checking out our other work.