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Troubling Questions about ‘Cap and Trade’

Professor Bruce E. Johansen

Now that the Environmental Protection Agency has belatedly classified greenhouse gases as pollutants, how do we get to the point of street-level regulation? Now comes the tough part: ‘walking the walk.’ How do we really cut emissions of greenhouse gases before feedbacks in the Earth system make any such effort futile? What do we really change in our daily lives?

To regulate greenhouse gases, they must be measured. So the EPA is preparing to order large U.S. corporations to compile and report their greenhouse-gas emissions. While they are at it, the EPA should require the same kind of audits within government agencies. President Barack Obama should order the Pentagon, for example, to calculate its carbon footprint — including the first-ever report of the greenhouse-gas emissions for modern, mechanized warfare in Iraq and Afghanistan.

Cap and Trade

To curtail greenhouse gases generally, the only strategy currently generating any political momentum is ‘cap and trade’ — with Wall Street investors in particular viewing it as a potentially lucrative new market in which to make money. A straight-forward ‘carbon tax’ would undoubtedly be more efficient, but nobody — in this political environment — wants to institute a new tax. For such an approach to be at all palatable, taxes would have to be cut on things we would like to encourage (lowering the income tax on labor would be a possibility), while raising them on ecologically destructive activities, such as greenhouse-gas emissions.

With a cap-and-trade system, a ‘cap’ is placed on the volume of greenhouse-gas emissions and then the emitting industries are allowed to ‘trade’ for the right to pollute. Companies that do not emit greenhouse gases to their limits can sell their rights to others, creating a market that rewards emission reductions. Over time, limits tighten, raising the price of pollution.

The cap-and-trade system operating in Europe relies on the market to establish a gradually shrinking target for Europe’s carbon dioxide emissions, and then divvies it up by country. At regular intervals, each country then allocates ‘shares’ to power plants and other factories which are less than their previous use, thereby forcing them to cut emissions, get credit for reducing greenhouse gases in developing countries, or buy spare ‘allowances’ from other firms to make up the shortfall. That creates a market — and a market price — for allowances.

‘Cap and Hustle’

Use of such a cap-and-trade market in Europe, however, has shown itself to be vulnerable to various business hustles. The European Union’s issue of a limited number of industrial permits to emit carbon provoked an old-fashioned ‘lobbying for favors’ that enriched some of the EU’s biggest polluters and (by the end of 2008) produced very little actual reduction in greenhouse gases.

Large utilities and basic industries convinced the European Union to give away most of the permits free — in large numbers — so the market nearly collapsed. Europe eventually issued a new system of permits that traded about $80 billion during 2008, most of which was recouped from consumers in the prices of goods and services (often as higher electric bills). However, the volume of carbon dioxide emitted by plants and factories participating in the system rose 0.4 percent in 2006 as compared to 2005 and another 0.7 percent in 2007.

Germany’s power company RWE, Europe’s largest industrial source of carbon dioxide, reaped $6.4 billion in three years. Companies throughout Europe took in about $374 billion at the peak of the market, as various national governments (most notably Germany) added exemptions and bonuses that fattened the take.

“It was lobbying by industry, including the electricity companies, that was to blame for all these exceptional rules,” said Hans Jürgen Nantke, the director of the German trading authority, part of the Federal Environment Agency.

Cap and Dividend

James E. Hansen, director of NASA’s Goddard Institute for Space Studies, proposes that carbon taxes be returned to people under a “Cap and Dividend” program to help individuals cope with higher energy prices. He described the concept:

“In hard economic times with high fuel costs, the public will rebel against any carbon tax — unless 100 percent of the tax is returned immediately, monthly, to the public on a per-capita basis. The public is fed up with politicians spending their money in cahoots with alligator-shoe-wearing, toad-eating (just kidding) lobbyists. Carbon taxes will drive energy innovations and the dividend will spur the economy. Taxes can be fruitfully initiated on a national basis; any trade disadvantage should be eliminated via an import duty on products produced in other countries that do not impose a comparable carbon tax, with 100 percent of the duty added to the per capita dividends.”

According to Hansen, “Cap and Trade does not have a prayer of phasing out fossil fuel emissions fast enough to save the planet, e.g., allowing us to phase-out coal-fired power plants. Clearly there must be people in the Obama Administration who understand that. Yet Cap and Trade is still talked about as if it were something good. One wonders: do they really believe we have ‘a planet in peril’?”

A ‘cap’ raises the price of energy, just as does a simple honest carbon tax on oil, gas and coal at the first sale at the mine or port of entry,” Hansen stated. The term “cap” is a euphemism, Hansen said, “disguising the fact that it is a tax, assuming that the public is a bunch of dummies who will never catch on. With all its hooks and eyes, ‘Cap and Trade’ will allow a lot of funny business. At least we would get a few Wall Street millionaires back in business — via speculation and gaming the Cap and Trade system (funded by John Q. Public, of course).”

Hansen said he had read on politico.com that the number of lobbyists in Washington, D.C. working to influence federal policy on climate change increased in the past few years by 300 percent to 2,340 lobbyists: four climate lobbyists for every member of Congress. “At least the alligator shoe business is doing well. Not too good for alligators, though,” he said.

Frederick W. Kayser Professor of Communication at the University of Nebraska at Omaha, Johansen is the author of the three-volume “The Global Warming Combat Manual” (Greenwood Press, 2008).