This page has been archived and commenting is disabled.
Cap&Trade - A Train Wreck
What to do with carbon based emissions? I have no clue. I’m not sure
Congress does either. They will be more confused than ever after reading
a recent CBO report on the topic.
In theory, the Cap&Trade approach is simple. A market will be
formed. There are two classes of participants. Those that produce carbon
based emissions, and those that don’t. The government will intervene
and provide a floor price (a cost to produce carbon based energy). The
government will also provide a ceiling (to insure that the cost of this
is not too expensive). Finally, the government will provide “allowances”
to certain green participants. Those allowances can be sold for cash in
the ‘market’.
Wait a second. Hold on. There is nothing close to being
‘simple’ about this. The government is going to be on the buy-side and
on the sell-side at the same time and they are going to be handing out
allowances that are worth money? What the hell kind of plan is that? It
gets better. Consider the following slide from the CBO on the
theoretical size of the Cap and Trade market:
Note that the estimate for the buy side of Cap and Trade is between 70-80b. A very big number.
It is 6Xs the wheat market. It is a bit smaller than Nat Gas. It is
equal to the combined soybean and corn turnover. It is 60% of the action
in the 30-year bond.
Wheat, corn, gas and the long bond are MONSTER markets. There are 100rds
of thousands of participants. There is billions of equity money behind
these markets. Under most conditions they are highly efficient. They
allow for a high degree of price discovery. Most importantly, the
efficiency of these markets is dependent on an extremely high usage of
derivatives. Note that the corn/soy primary market of $80b produces a
combined exchange traded and OTC derivatives total of $10 Trillion.
Based on the CBO data the ratio of primary to derivatives is 125 to 1.
The CBO looks at this and correctly concludes that a market this big has it’s own systemic risks:
For
example, a rapid increase in allowance prices could raise electricity
prices, which would harm U.S. businesses that rely on electricity. The
risk of cascading disruptions from the market for a single asset, such
as allowances, to other markets and possibly the entire U.S. economy is
called systemic risk.
So to address the systemic risks what are the suggestions?
Prohibition on Traders
BK: Dumb idea. Without traders there is no liquidity and then it becomes
a government bucket shop. The worry is that there will be some sharpies
in Chicago who make a killing off of this. But without the sharpies
there is no market.
Circuit Breakers
BK: That there is a perceived need for this when the government is going
to be on both sides of the market to begin with just shows how worried
these folks are.
Prohibition on Derivatives
BK: Dumb idea. There will be no market without derivatives. Can’t and won’t happen.
Reliance on Centralized Clearing
BK: Anything that can be traded on an exchange can also be traded
“upstairs” or “on the curb”. It merely requires a buyer and a seller and
a willingness to settle up based on a future date price. Markets don’t
work the way the CBO thinks.
Increased Regulation of Over-the-Counter Trading
BK: Accepting that Centralized Clearing is not possible; they propose new regulations. That has never worked.
Position Limits
BK: What limits? Who sets them? Does EXXON have a bigger limit than
Goldman Sachs? Limits don’t work. Want an example? Just look at JPM and
silver.
I am quite certain that the CBO believes that A) Cap and Trade is coming and B)
that it will result in a very big market in a relatively short period
of time. I draw that conclusion in part from the cover page of their
report. They actually believe that the guys in the yellow coats are
trading futures on “Allowances”.
The CBO provides a description of who might play in this sandbox:
Energy producers and other covered entities that would have to comply with the cap on emissions;Great! Another profit opportunity for Exxon.
Entities that would receive allowances from the government but would not be subject to the cap;Just who would get these allowances?
Businesses and individuals—mainly banks and investors, as well as companies that use emissions-intensive goods and services—that would trade allowances and related financial products with the first two types of participants and with each other.Just one big happy family of traders and crooks.
Washington
has no idea how markets work. They have some Utopian notion that
markets can work efficiently without the bad apples like speculators and
ugly things like derivatives. That they don’t understand this makes it a
certainty that C&T will end badly.
-The government will lose money supporting a bastard market.
-The probability of a Goldilocks outcome is small. The extremes of
either, (i) nothing is accomplished with emissions (supports too low) or
(ii) too high a cost is established and the economy tanks, are just as
probable as a favorable outcome.
-The only winners will be the banks, hedge funds, exchanges, specs, arbs and the derivative players. (AKA “Greater Wall Street”)
I don’t think there was ever much support for cap and trade. The last
election probably killed it. But anyone still standing that thinks this
is a good idea should read the CBO report. The table of contents tells
it all:
Note: I have a number of articles of late based on reports
from the CBO. Now another. Sorry if I am beating this horse to death.
They just keep dishing up stuff that I think is worth noticing.
»
- advertisements -
Cap and Tax is the way to go. It starves the Vampire Squid (Goldman Sachs).
http://www.carbontax.org/introduction/#why
It can be revenue neutral with taxes funding R&D in renewables or deeper tax credits for businesses and individuals to purchase energy savings systems, vehicles, appliances.
And I don't really give a shit whether or not global warming is real...I know my fucking need for cleaner air is real.
.
Cap & Trade
Building yet another Casino for the Junkies to Gamble in.
Like we don't have enough, or big enough ones already... hey lets get MORE...
dup
Over time man has have been moving from carbon through hydrocarbons to hydrogen. Wood to coal to oil to natural gas to hydrogen without this mechanism. This Rube Goldberg device and all of the possible unintended consequences are not needed.
I don't know whether global warming is real, but I certainly hope that it is. The earth has spent most of the last 1 million years in a series of ice ages, punctuated by brief interglacial periods (like the one we are living in now). These short warm eras have generally lasted a few thousand years. This latest interglacial has lasted longer than most, but climate records strongly suggest that the we would most likely slip into another ice age fairly soon if something isn't done to break the existing pattern.
If the global warmists are right, south Florida might be flooded. (It is already partially flooded anyway). But another ice age would mean glaciers covering Canada and a large part of the midwest. Which seems like the greater danger?
There's a theory that continued warming will shut down the thermal haline ocean convery and eventually lead to more rapid cooling and glaciation.
See the end of Little Ice Age, Big Chill that showed on the History Channel.
Bruce is right as usual - this version of cap and trade is a scam. And whether or not you believe in man-made global warming, you are likely to see economic catastrophe as a down-side. This seems obvious, but to many academic scientists, it is not. The question I've never seen answered to my satisfaction is: when global warming becomes a considerable problem, why not fix it with a huge sun shield from space? That'll cool us off, and it doesn't even have to block out a big % of the light from the sun. The best argument I've heard against it is that we don't know what might happen. Just fear. But if people are really suffering (and if they're not, what's the problem?), it seems like an easy enough fix, and preferable to an economic catastrophe, which we know will lead to mass suffering.
The endgame of AGW, Obamacare, Itan/Afghanastan, Medicare, welfare, et al, is that one day the Red Chinese, Russkies & the A-rabs will cease to fund it while Helicopter Ben prints $$$$ on and on and on.
After stagflation that makes the late 70s/early 80s look like penny ante poker, the US will be flat assed broke and bereft of capital formation.
The good news is, this ain't happening in the States. Europe's experience has been just godawful, fraud and waste up the wazoo. In one recent case, a green energy "producer" was caught using a diesel engine to turn a windmill for the subsidies. What would you expect?
Europe has been the market for carbon under UN framework for some time. The Squid, Blackstone, Deutsche, etc. all have desks for carbon set up and trading. Everyone hear about the damn project in Ghana that Blackstone helped finance? Certainly wasn't out of the kindness of their heart.. it's for the carbon credits. Wait till they try to bait in EM as the big buy block... some serious "pent up demand" if they can convince them of the farce. lol
US is just trying to get in on the game because our gov is owned by the banking lobby. Nobody thinks to calculate the damage to corporate earnings (and econ growth for that matter)... on the buy side of course.
And since scientifically enlightend people are certainly all Evolutionists, why does no one ever ask the bigger questions?
Why does man get to decide what the "right" temperature is?? There are many species that would love a warmer climate. And since man is morally equal to all other species, why do we get to make the call on temperature?? Who is man to make that determination and why do we think we are superior to all other species?? How self-centered.
And wouldn't man adapt or "evolve" to the warmer temperatures over time?
And was the temperature in the Ice Age the "wrong" temperature or the "right" temperature??
Seems these questions should be addressed before we spend a bunch of money.
Leave Teletubbies stuff for saturday morning in Kindergarten.
It's not about our decision of what is a right climate for us. It's about a climate that already was and that we're subverting. THAT is completely homocentric, because for our own desire we keep modifying the biosphere at a heightening pace. The rest of the ecosystem can't go at such paces, and thus an unsustainable track is being run, and that leads necessarily to collapse.
It's not about the right temperature per se. It's about not changing it. Because the rise in CO2 will not only affect temperature, but also the sea and all its ecosystem. Without the sea we ALL die.
We've been thinking that we're superior all the way ever since we started puffin industrial-produced CO2 in the atmosphere. I guess it's time we think again.
The "climate that already was" has varied enormously over the millenia. Which temperature that "was" should we be targeting?? Is it the temperature that existed 50, 100, 500, 5,000 or 500,000 years ago? Thinking only in the context of humans and recent history is so narrow. Are volcanoes now (or in the past) "subverting" the climate? If so, maybe we should do something about that.
Has the ecosystem ever "collapsed" before? Might say it did when the dinosaurs got wiped out or the Ice Age. So "collapsing" ecosystems are a naturally recurring event in Earth's history. Shocking you (and other humans) think you know precisely what the climate, ecosystem and biosphere should be to the nearest degree. And I thought we were taught that we are no better than any other species. Doesn't Darwin naturally lead us to be "homocentric" -- survival of the fittest and all that stuff. You don't think ants are ant-centric??
Got to think through the logical ramifications of true evolutionary belief.
D-Falt,
They have been played because they have hobbled their economies with cap and trade regimes while China, India, the US and the third world have done nothing.
That point may be true. Then again, the manner in which some of them "met" these targets involved what would be described as "Greek Accounting Practices."
Long ago prophets warned us that some day they would have us paying for the very air we breathe. Yeah right!!!! HA!!!!! HAAAAA!!!!!!
Wait... WHAT?!
More importantly, what does any of this mean for Ag stocks, Ag commodities, and metals (across the board. if the bill is dead, why worry?
The US prefers "none of the above". Seriously, the US isn't going to do anything. Zip. Zero. Nada. Rien. Not now. Not ever.
It didn't happen (didn't even get brought up for a vote) when the Democrats held the Presidency and the largest majorities in both houses of Congress for generations (a filibuster-proof majority in the Senate). If it didn't happen then, its certainly not going to happen now after November's election results. The high water market of the global warming scam in the US was the Kyoto treaty going down in flames 99-0. How's that for bipartisanship?
Before long, the EU and Japan will wake up too and realize that they have been played for saps.
In what way have they been played? The last time a European nation successfully reduced their CO2 emissions YoY was when the Berlin Wall fell and all the state-run East German, Polish and Chech factories got shut down. The US managed it two years in a row once. 2008 and 2009. The only successful way to reduce CO2 emissions is too massively fire the work force in industrial nations...
Either way, "cap and steal" is a bad idea, but I will front run any capital flow these days. Hasn't this been killed already? The GOP should certainly be able to do that in January. There can't be any GOP representatives actually supporting this, can there?
From my perspective fee & dividend is a much better approach. The idea is to charge a standard price on carbon at the well/mine head. This price would be gradually increased over time according to a stable published schedule. 100% of this tax would be refunded on a per capita basis. Thus if you lead a low carbon lifestyle your standard of living may actually improve. And if you lead a high carbon lifestyle you will pay a lot. This approach prevents banks from profiting from the carbon market and prevents governments from redirecting the funds. 100% of the revenue goes towards changing behaviors in a visibly fair way. Fee and dividend appears so obviously better I do not understand why the preference for the complex, bureaucratic, and bank friendly cap & trade.
Can someone please explain why the US prefers cap & trade over fee & dividend?
Why every solution has to be a market solution? Market is not god, is not infallible, and it brings in many demons to everything it touches. While markets might work for some things, they are not one size fits all.
The emmissions problem is not something you can wash away in market fantasy.
I thought Cap&Loot was dead...this thing is like a zombie now
Like the TBTF banks that will sponser it.
Great article as always Bruce!
Agreed. How would these markets be regulated properly? How would these new regulations affect the rest of the markets? The JPM example is perfect because the CFTC is still failing at stopping one of the greatest financial monstracities of all time.
Also, cap and trade would create a huge dead weight loss on the economy, with the taxes creating a gap above revenue (not to mention the tax itself would burden the consumer).
Oh and on an ecological note, what matters most is that we should cease our pollution of the planet, instead of worrying about global climate change or whatever the kids are calling it these days (wasn't it global cooling in the 70's?). People should stop driving so much. It is a waste of time. Just go for a walk if you are restless, and read a book if you need to relax your body.
+1,000 thank you!
"Oh and on an ecological note, what matters most is that we should cease our pollution of the planet, instead of worrying about global climate change ... "
" Just go for a walk if you are restless, and read a book if you need to relax your body."
So that is the "common sense" that I've heard so much about. I was starting to think it didn't exist...
http://freegeographytools.com/2007/high-resolution-sea-level-rise-effects-in-google-earth
Nice graphics of lower Manhattan without a carbon market.
That's cool, we didn't need Manhattan anyway. Really the island has done more harm than good....
Brilliant!! We'll invent a market that deliberately buys and sells you the right to do what you were already allowed to do to begin with! Then, we'll tax these shares as a asset when you sell them or attempt to leave them to your next of kin. This sounds about as fair and square as a the "fire insurance markets" the KKK used to operate in the bad old days.
the global recession was supposed to take care of green house gases for a while. but Healthcare was a handout to Wall Street, why should this be any different? interesting that the President wants to treat corporations like public trusts, when SCOTUS wants to treat them like individuals, and some smart lawyer will figure that means their liabilities for damages and product safety violations are risk on. a polluting company is like a guy in a no smoking zone, puffing on a cigar. if you take the smoking analogy to heart, you understand how easy it would be to correct bad behavior, if only the political will would follow. to that end we need to fix the campaign finance laws first..
The invisible Al Gore; hiding low since climategate; the Valerie Jarrett, GS, Obama CCX scam disbanded; but they tried, didn't they?
Bruce, you forgot the most important "cencern" of them all: thsi form of cap and trade does NOT reduce greenhouse gasses or otherwise helps the environment! Why? Well, the only reson an "entity" will ahve allowances to sell if it does not need them. So, rather than not producing pollution, they will let someone else pollute more! Where's the benefit for the environment?
I hate dogmatic solutions, but in tis instance there's one that works: If you want less fo something (pollution) - tax it!
Wouldn't tax be simpler to implement and administer than Cap, Trade, Steal and Tax?
Man-made global climate change is a complete fraud and a scam cooked up to justify a massive redistribution of wealth from the West to everyone else.
I suppose I shouldn't complain, though, since I have made a tidy sum trading those fraudulent carbon credits.
People "believe" things all the time, knowing the difference between factual data and myth or good science and junk science makes all the difference. Who blogging here has actually been to any Chinese city and witnessed the smog? I have, and L.A. has nothing on these guys. No one can argue that mankind has had NO impact on the environment. Common sense tells you otherwise. Is global warming man-made, maybe. One thing that is clear from the fossil record is that every time the earth warms, a mass extinction of the dominant species occurs.
I guess the real question, relative to the article, is whether or not we want another avenue for the elite to extract real value from the working stiffs of the world. In response I would have to say "hell no". I mean, if you grow trees on your property for fire wood and replant every year. Aren't you already "carbon neutral".
Perhaps a return to manufacturing in the US, where we have actualy standards, might help? No, no, that doesn't benefit the oligarchy that's trying to foist cap and trade on us.
you're fucking backtracking.
First it was "warming," now it's "changing climate." As if pollution EQUALS emissions in a broad sense.
The earth will survive without us, it does not orbit around us.
The *real* issue is one of attempt to sustain exponential growth. As for warming and whatnot, the aerosol contamination over much of china and the Indian subcontinent has produced a net cooling effect. Also, pan evaporation data from farmers shows a 30% decrease in surface solar intensity over the past 50 years.
If the POINT of the AGW crowd is to sound the alarm on the growth problem then let them do THAT instead of trying to squeeze in a growth cap via some junk science and fabricated data. The ends do not justify the means.
I've often thought of this and I think I've concluded that either we will find a way off of this rock and into the business of space colonization OR there will be a massive population die-off within our species. Nobody is able to escape the e^x.
Extinction is a real possibility, but like you say, the Earth will be here for awhile, with or without us (another 5 billion before the sun expands and toasts us like a marshmallow if I'm not mistaken).
When Toba blew humanity went down to 3,000 individuals or so but did not become extinct. Wiping us out doesn't seem that easy once you realize that.
Wow, that is remarkable. I was under the impression that you would need something like 20,000 breeding pairs; but if it is that low, we might just have a chance :-D
Honestly, I don't think we'll go extinct. I think humanity will reach type 1 civilization. At the very least, you can argue that we have to potential to do so. We are so frail individually, but universally speaking, the human being is one tough bag o' meat.
Smog killed people in London ... they fixed it.
Smog was nasty in LA ... California regulated emissions more than the rest of the country and cut way back on it.
I'm sure that simple self preservation will lead the Chinese to resolve many of their pollution problems. Letting your rivers run orange with lead oxide from reprocessing batteries is self-limiting in the shorter term rather than the long-term.
We need to return to a scenario where the elite are few, and have little power compared to the many.
Please hold still citizen while I cram this shit back up your carbon-nonsense ass.
Nothing but fraud-stench from top to bottom - not even the word "market" sticks to it as everyone knows this is vapor and bullshit.
People who believe they are making life or death decisions to appease impersonal arbiters of societal survival do crazy things. They sacrifice children to Moloch, throw virgins into volcanos, and apparently given the opportunity (and enough junk science) they will hand the economy, naked and beaten, over to the financial piranhas.
The people who believe them are the real victims.
well, it would be incumbent upon me to comment on this mini-wreck. "holy shit!" just for starters.... if there was any vestige of doubt left in me as to the lunacy of USG, it has now vanished - gone poof. i smell heap big rats all over the place... those being the hairy ones that can smell money. oh, BTW, who's gonna run the "exchange"? allegedly USG, huh? big fat contract soon available, with various sub-contracts, kick-backs, bribes and assorted weird malfeasance: bids being accepted now...sign up here
A global monetary and financial system based on carbon, more ubiquitous than any precious metal. Already identified the producers of carbon, recipients of carbon credits and traders of carbon based derivatives. Just need to hammer out the details as to who are permitted to be the winners, and of course, who are to be the ultimate losers.
I have some left-over charcoal I will bury ( carbon sequestration )
Let's start the bid at $50/ kilo
I am of the belief that the housing bubble was a "conspiracy" to keep the aggregate debt bubble expanding, less the whole thing collapse. Likewise, I believe Cap and Trade to be a similar "conspiracy" to keep the same debt bubble expanding. I don't believe all those who participate in the conspiracy realized what they are/were a part of... simply co-opted along the way.
The failure of Cap and Trade hastens the inevitable collapse.
Man Bear Pig
I'm super serial
http://www.youtube.com/watch?v=a9wmczxnT3c&feature=related
Well we have this shit in Yurop http://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme
With the whole EU thing the guy on the street has no voice, who da fuk voted for this ?!?!?!?!