Carbon Trading and Innovation or Capp-and-Trade and Lobbying?

According to Robert Shapiro, former US Undersecretary of Commerce for Economic Affairs "Cap-and-trade combines a regulatory cap on greenhouse gas emissions with a market-based scheme to trade as financial instruments the “permits” to produce those emissions. For all of cap-and-trade’s initial promise as an answer to climate change, the current financial crisis has made its vulnerabilities painfully clear. The strategy would have the government create trillions of dollars in new, asset-based financial instruments. These emissions-right-backed securities, like their cousins, mortgage-backed securities, also would throw off a host of new derivatives to be profitably traded by the “professionals.” Unsurprisingly, cap-and-trade’s fiercest promoters include Wall Street institutions that see emissions-permit trading as a lucrative new market that could earn them billions in new fees, commissions and, while it lasts, speculative gains. But after Wall Street’s meltdown, the proposition for another round of the financial merry-go-round that produced the worst economic crisis in our lifetimes seems either very naïve or very cynical."[1]

Shapiro goes on to mention a number of economic reasons why they should not be adopted. We are releived the ill conceived Australian CPRS scheme has been shelved and discuss more viable alternatives at our web page about replacing Kyoto

The Carbon Tax Centre regard carbon taxes as superior to carbon cap and trade systems for six fundamental reasons. They are

  1. Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
  2. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
  3. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
  4. Carbon taxes can be implemented with far less opportunity for manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
  5. Carbon taxes address emissions of carbon from every sector, whereas some cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.
  6. Carbon tax revenues would most likely be returned to the public through dividends or progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.[2]

TecEco are particularly concerned with reason 4 and note the rapid recent growth of the lobby industry around the world. We agree with Phil Radford, executive director of Greenpeace USA when he said "Legislation needs to be based on the science, not based on which lobbyists paid the most"[3].

What few others are writing about is that most cap and trade systems only allow offsets that are internally generated by the polluters in the system. That external offsets generated as a result of vital innovation appear to be excluded is of considerable concern.

[1] Shapiro, R. J. (2009). "Is Cap and Trade a Dead Policy Walking?" Retrieved 7 June 2009, 2009, from http://ndn.org/node/3761.

[2] CTC. (2009). "Tax vs Cap-Trade." Retrieved 6 Jun 2009, 2009.

[3] Walsh, B. (2009). "Greens Celebrate Cap-and-Trade Victory — Cautiously " Time 22 May 2009. Retrieved 06 Jun 09, 2009.