Why Cap & Trade Is Fatally Flawed

What is cap and trade in emissions? With the public goal of reducing (only) carbon emissions, it’s where companies, traders and speculators buy and sell offsets and permits allowing emissions. This is done in a commodity market-like exchange — and here’s the crux of the theory; caps on maximum emission levels will periodically drop, leading to higher prices which in turn lead to lower emission technologies.

In this scheme, companies that are not sufficiently reducing their pollution can buy permission to continue polluting:

  • from other polluters who’ve lowered their emissions and so have “surplus” permits to sell
  • or they can buy “offsets” from projects that create new or additional emission reductions in the future that wouldn’t happen otherwise.

Passed in the House and when this was written, it was in the Senate, the Waxman-Markey (WM) cap and trade bill unfortunately was fatally flawed as was the other Kerry/Boxer (BK) version. Why? Because, bottom line, they were written to gain the support of wealthy, polluting industries that don’t really want to  change their current business model of making a profit at everyone else’s expense. These two cap and trade bills, having what the EPA described as  “fundamental similarities in approach, caps, offsets, and other critical design parameters”,  were essentially a combination of the following:

  • an elaborate cover to drag their feet and keep doing business as usual as long as possible
  • shell games which hide, move or switch one form of pollution for another around the board/world

In fact, contrary to the popular but mythical “success story” of acid rain, cap and trade hasn’t worked before. Nevertheless, the acid rain story is a beautiful example of cap and trade’s shell and con game:  lowering acid rain pollution a bit while increasing global warming pollution. For many reasons, one of which is key, the cap and trade bills just won’t help us convert to a clean enough economy in time.

The Key Flaw:
Setting A Goal That, If Accomplished, Still Loses The Game

The latest report from the Intergovernmental Panel on Climate Change, essentially the world scientific consensus, concludes that to avoid the worst effects of global warming, by 2020, now only five years away, the world needs to reduce 1990 carbon emissions by 25-40%.*

*  Germany’s established goal is 40%.

*  The European Union’s goal is 20%.

*  Waxman-Markey’s and Boxer-Kerry”s goals are 4-5%!

That’s a huge difference! — 75-80% lower than the EU, 87 -90% lower than Germany’s and far, far below what the world scientific consensus concludes we need!

Note that the 17% emission reduction goal which we hear so much about in WM is based like a shell game on switching benchmark years and hoping we, the people don’t notice. Their 17% is below the much higher emissions levels of 2005 but it’s only 4% below 1990, the benchmark year the U.S. and the world agreed to use for emissions reductions. Likewise, the 20% goal of Boxer-Kerry is also below 2005 so it’s not much better than Waxman-Markey.

Right out the gate, even if their goals were achieved, it means we risk making the worst effects of global warming inevitable! Why risk that if we don’t have to? The U.S. National Renewable Energy Laboratory concluded that photovoltaic solar energy could supply 100% of America’s electricity needs! These hugely inadequate goals, which will push others to lower their goals, should by themselves galvanize Americans to tell Congress and the President that America Can Do Better! And our petitions are one way to do just that.

Setting Targets Which Self-Destruct

To make matters worse, these bills will not even achieve their extremely weak goals as they’re “targets” which, pun intended, essentially offset themselves. This is because of both their lack of real consequences — relatively small fines, no decision makers lose their jobs nor do any companies lose government contracts or subsidies  — and their huge exemptions, offsets and subsidies, a few of which are noted below.

Both bills establish exemptions for entire economic sectors like agriculture that won’t have to work at reducing their emissions. This is despite agriculture being one of the largest contributors to global warming, with livestock production alone contributing 18%,  more than transportation — not to mention conventional factory farming’s use of artificial, chemical fertilizers being one of the largest contributors to ocean pollution, an issue not even addressed by WM or BK.

  • In contrast, True Cost-Benefit Pricing effectively addresses agriculture’s contributions to both problems by making their true cost to society and the environment increasingly visible with Anti-Pollution Tax (APT) Taxes, and letting the market imperative of lowering costs encourage constant improvements and replacements by ever eco-friendlier/less expensive, organic products, services and methods.

With A “Cap” That Doesn’t Really Cap, “Trade” Is A Charade

Waxman-Markey (WM) and Boxer-Kerry (BK) also establish huge offsets of up to 2 billion metric tons of CO2 emissions per year. This vast annual amount, around 28% of America’s 2005 total emissions, is so huge it’s greater than the annual reductions required each year from 2005 to 2026! In other words, they were a phony offset.

But the incentives for fraud are equally huge as is the difficulty in making sure offsets are really new or additional and will in the future actually be as large as claimed. In order to prove that an emissions reduction wouldn’t have happened otherwise, in other words it’s truly additional, and proving “negatives” are notoriously difficult for good reason, 1000’s of offset projects try to “demonstrate” to one or several of currently only 26 certifying companies in the world (DOE’s) that:

  • a comparable or less emission-intensive technology isn’t commonly used or is not legally required — for if everyone is doing it or it’s required, why should anyone get extra money/offset credit for doing it?

Right away, we have three very perverse incentives in place:

  • Offset projects have an incentive to hide the fact that there may be comparable or cleaner technologies available!
  • They have an incentive to resist the market’s technological progress — the wider adoption of  comparably clean or cleaner technologies!
  • They have an incentive to resist the spread of future legal requirements for becoming cleaner!

Then add to all those perverse incentives the fact that there’s only 26 elite validating DOE’s in the world with only 2 accounting for nearly 2/3 of the world’s offset projects  both of which have already been suspended, then reinstated! So now we have arguably the most super-concentrated industry in the world that’s also very wealthy, growing very quickly  and they have all this money, power and incentives to engage in fraud and resist progress! Most people would say this is a 100% guaranteed set up for fraud and failure. But wait…there’s more!

These elite companies not only often compete with each other to come up first with a validation, (more room for fraud) then with larger reduction numbers for their clients, (even more room) but they are the ones who funnel information to their UN “regulators” who “regulate” them in their own offices, not in the field where the projects are. (Yet even more room.) It’s no surprise then that two Stanford scientists estimated 1/3 to 2/3 of projects in the 7 year European cap and trade program were not real or additional! Now add to that a titanic, 2 billion metric ton wave of new demand each year for offsets. Under pressure to supply that demand, the speculative, inherently low quality of offsets will inevitably take a huge dive, like the Titanic. But wait…there’s even more!

When offset projects don’t result in their predicted future reductions, which is quite often, or it turns out that they’re not really new or additional reductions that wouldn’t have happened otherwise, it’s too late. The offsets were already paid for and are circulating in the market, just like the junk, sub-prime mortgage-backed bundles of securities that triggered the recent Great Recession that devastated our economy and society.

These offsets, like hot air will effectively blow a huge hole through the cap, creating perhaps a new economic crisis but certainly creating a new, global, environmental crisis while squandering the precious little time we have to radically reduce pollution. WM’s 17% reduction from 2005 that’s supposed to happen by 2020 won’t happen until the mid 2030’s and if we use 1990, the world’s benchmark year, — we might not drop our emissions back to 1990 levels until around 2060, let alone 25 to 40% below 1990 levels!

By then it will be 40 years too late. We’ll have probably gone past the tipping point towards runaway ecological, economic and social chaos world wide. See the U.S. military’s Global Warming report.

  • In contrast, and using the example of forest preservation as an offset, according to True Cost-Benefit Pricing and the principles of business liability and paying for services rendered, industrial countries responsible for the world’s current air pollution should pay communities in and around forests in poor countries to preserve, maintain and restore their forests. This would be in order to, among other ecosystem services they provide, pay them for their forests taking out of the air the excess CO2 we industrial countries already put into it — instead of, as current offset programs propose, paying them offset money as “justification” for emitting even more CO2!

More Money For Dirty,  Dangerous & More Expensive

Both cap and trade bills give more money to dirty, polluting and more expensive methods of energy production such as coal and nuclear, than they do to clean, less expensive renewables like solar and wind. A good example of this is giving Big Coal $10 billion for an end-of-pipe dream — an unproven, untested, carbon storage and sequestration technology, (CSS) that is more expensive than solar energy, even with current pricing that ignores coal’s huge social/environmental costs!

  • Coal with CSS in one industry estimate is $.169/kilowatt-hour compared to photovoltaic solar electricity at $.15, with current rates and 0% loans available. Going forward though, coal with CSS will become even more costlier than solar for the following two reasons. One,  solar costs have gone down an average 4% per year even without a True Cost pricing-induced mass production boom that would make them fall even faster. Two, unproven technology cost estimates usually rise over time.
  • CSS essentially uses additional energy to store CO2 in a “nearby spent reservoir/seam/hole” in the ground, then when that’s filled into another “hole” further away until which ever comes first,  no more holes are available or economically worthwhile, until there’s a bad leak, the land sinks or there’s an earthquake (which has happened in LA as a result of oil drilling.)  Because there’s no guarantee of it staying underground and out of our air, CSS is yet another example of the shell game —  moving the pollution around the board but not off it. Or it can be looked upon, like nuclear waste disposal, out of sight, out of mind, and kicking the can down the road for future generations to worry about – the ultimate in immoral irresponsibility.
  • And even if CSS were “successfully” and widely implemented within its advocates estimates of 7-10 years, it would just continue if not also expand and worsen the problems and costs of coal mine accidents, deaths, injuries, black lung disease, Appalachian mountaintop removal and stream destruction, slurry dam failures,  Canadian tundra and forest destruction and the ash and mercury pollution of our air, rivers, aquifers and eventually the ocean.

Cap and Trade Won’t Get The Job Done Safely or In Time

And here are even more reasons why cap and trade is fatally flawed. Because of

* the general instability of prices in commodity exchanges (spikes, dives, bubbles, busts),

* the vulnerability of these markets to speculation, manipulation and being “gamed”

*  and the focus of both bills on keeping carbon costs artificially low for as long as possible, (the EPA estimates that WM has carbon only doubling in price after 13 years!) instead of increasingly letting reality determine them,

private investors simply won’t have the confidence to invest in this coming decade the huge amounts of money in clean, renewable energies and technologies necessary to slow, stop and reverse global catastrophe!

Furthermore, with both bills’ nuclear energy subsidies showing the world nuclear power is okay, even though not economically viable enough to stand on its own, with the relative ease of weaponizing nuclear power plants as we see in Iran and the tendencies of political leaders, countries and human beings towards error, power and mutual hostility, especially when in stress, these bills contribute to a higher likelihood of even more nuclear proliferation, nuclear accidents, nuclear terrorism and nuclear war — which if it highly likely doesn’t stay regional, escalates to WWIII.

In contrast, with the spirit of a Green Pearl Harbor and Recovery, everyone pitching in and doing their best along with across the board True Cost-Benefit Pricing for everyone, there would be

*  no exempt economic sectors, no exempt pollutants, no permits to pollute and no offsets that “promise to reduce future emissions that wouldn’t otherwise be happening”

*  no uncertainty on the part of investors, businesses, homeowners and citizens regarding the pricing of pollutants or whether investing in eco-friendlier technology, goods and services is profitable or can save them money.

*  no corporate welfare subsidies for expensive, dirty and dangerous energies like coal and nuclear, nor would there be a commodity exchange where a few get rich “verifying” offsets and buying, selling and speculating in permission to continue to pollute

Instead, the focus of True Cost-Benefit Pricing will be on:

  • the many throughout the economy buying, selling and using products, services and methods that constantly reduce pollution
  • a Smarter Capitalist free market — free from deceptive pricing and  privatization of profit and socializing of  costs. Instead, Smarter Capitalism uses True Cost-Benefit Pricing, supply, demand and the market imperative to save money and cut costs to sort out, from the bottom up, which products, services and methods are the least costly, safest and healthiest for society, future generations and the environment.

Some Fun Comparisons!

Finally, let’s have some fun with a few comparisons. Besides being an elaborate cover scheme for Big Business As Usual (as long as possible) and a shell game, cap and trade is also like…

  • After Pearl Harbor, as if underachieving companies that didn’t do the hard work of converting efficiently to wartime production and didn’t fulfill their wartime targets could buy their way out by paying companies that hustled for their  “over-target surplus”. (In fact, after Pearl Harbor, some car companies actually wanted to continue business as usual making cars for the public! Talk about resistance to change and not getting it!)  Of course, the public would have been outraged, just as we should be today with cap and trade.
  • Trying to constantly lower the speed limit and average gas used per American by allowing wealthy companies and drivers to a) buy permission to continue to go over the limit and pollute the air with an additional 2 billion metric tons of carbon a year, b) by allowing them to pay other drivers who were going over the limit to promise to now go under the limit, c) by allowing them to pay drivers already going under the speed limit to promise to go slower and d) by paying people around the world who are now walking or bicycling to promise in the future not to buy a car.
  • Compare that with how much faster our gas consumption would drop with True Cost-Benefit Pricing. Then, with predictably increasing gas taxes recycled back to the public, everyone does their share by driving less, going slower and using less gas as they now receive recycled gas taxes to help them buy higher mileage hybrid and all  electric cars, scooters and bicycles and get reduced fares and expanded service on new,  more extensive mass transit options, now also clean, electric-powered.
  • Finally, it’s similar to the medieval practice of indulgences where the Church sold and wealthy sinners bought their way out of Purgatory so they didn’t have to do the hard work of changing their sinful ways

* The scientific basis for reducing emissions 25-40% below 1990 levels for developed (Annex I) countries was developed by the IPCC and released in the Fourth Assessment Report. These emissions reduction targets were recently supported by the Kyoto parties in Vienna and Bali in 2007. See http://unfccc.int/files/meetings/cop_13/application/pdf/awg_work_p.pdf.