What is the Most Valuable Thing in the Entire World?
The Cap and Trade Shell Game: Unproven System Bets The Atmosphere
“What is the most valuable thing in the entire world?”
“The head of a dead cat.”
“Why?”
“Because nobody can put a price on it.”
– Zen Parable from Zen Buddhism Stories, Trout Lake Media
For over a decade, academics have been touting “Cap and Trade” (C/T) and a carbon credits trading market as the best way to achieve GHG emissions reductions without the extremes of full government regulation and complete inaction.
Although emissions trading has been claimed to be successful in the case of mitigating acid rain and leaded gasoline pollution, C/T:
- Has not been shown to be effective in reducing GHG emissions.
- Has been engineered by academics indoctrinated into the beliefs of a market system that makes so-far-unproven claims of optimality.
- Can only ever be as effective as the assumptions underlying it are accurate and complete.
Put another way, C/T is a complex system of financial engineering with the stated goal of managing emissions levels by establishing the right market conditions, while in fact it’s also designed not to make anyone angry, especially the global petroleum industry and moneyed free marketeers.
A brief overview of Cap and Trade
In a cap-and-trade system, the government sets a limit (“cap”) on permissible emission levels and allocates pollution allowances among the industry participants which allow them to emit their pollutants up to the capped level.
Some allowances are freely allocated while others are sold at Government auctions. They can also be bought and sold in the secondary carbon trading market. In theory this system provides incentives for finding low-cost methods to reduce emissions to meet the cap. If unable to meet the cap the polluters must purchase allowances.
In theory this will result in overall pollution reduction. The rationale is based on many assumptions, including:
- If a company produces a higher level of emissions than their allocated or purchased permits allow, they are taxed and can be penalized for the violation. On the flipside, a company that reduces their emissions can sell their allowances to other companies that pollute more. Or “bank” the credits for future use.
- Each year, the Government lowers the number of permits that are issued and therefore lowers the total emissions cap. As a result, permits get more expensive. Over time, companies have an incentive to reduce their emissions more efficiently and the logic is that they would benefit from investing in clean technology as it becomes cheaper than buying permits.
A toy illustration of Cap and Trade:
Stripped to its bare bones, C/T looks something like this:
Say Alice has a widget factory that emits 200 units of CO2. She has a cap of 150 units but also wants to lower her fuel bill and do a good thing for the atmosphere by installing a solar array for $1000 that cuts her emissions in half, to 100 units. She’s now under her cap and has 50 units she can trade as credits to someone else, to help pay for the solar installation.
Bob has a power plant that emits 1000 units of CO2, but his cap is 950 units. The fuel he uses is so polluting it will cost $5000 to mitigate the excess 50 units. Bob goes to the open market and sees Alice’s 50 units for sale. The magic, invisible hand of the market will establish the right price for those fifty units so that Alice gets a reduction in her capital outlay for the solar panels, and Bob …. Gets to keep emitting.
So Bob will continue to pollute, and nullify any environmental benefit from Alice’s renewable energy investment, until the Government manipulates the prices of emissions units to make it more expensive to purchase the credits than to install mitigations. This shell game where mitigations in one place are just transferred to unmitigated emissions elsewhere is quaintly termed “the waterbed effect” by economists.
What could possibly go wrong?
From this toy model, start plugging in other parameters: Government-defined fines for excess emissions. Government-defined incentives for clean energy innovators to produce lower cost solutions. Government-defined price floors so credits don’t become so cheap they aren’t of any value to emissions reducers. Government-defined price ceilings so the credits don’t become so expensive the polluters get angry.
How do you balance fines and the price ceiling? How do you keep the market “fair” and mitigate asymmetries between the participants? How do you police collusion? Where does the Government set floor and ceiling prices? And Government intervention? Industry hates that, and if there’s to be Government intervention, why not cut to the chase and mandate GHG reduction via a carbon tax? Because industry hates that too.
Then there’s what this looks like to implement. The current regulation document is 450 pages long, and contains poetic passages like:
“§ 95853. Calculation of Covered Entity’s Full Compliance Period Compliance
Obligation.
(a) A covered entity that exceeds the threshold in section 95812 in any of the four data years preceding the start of a compliance period is a covered entity for the entire compliance period. The covered entity’s full compliance period compliance obligation in this situation is calculated as the total of the emissions with a compliance obligation that received a positive or qualified positive emissions data verification statement or were assigned emissions pursuant to section 95131 of MRR from all data years of the compliance period.
(b) A covered entity that initially exceeds the threshold in section 95812 in the first year of a compliance period is a covered entity for the entire compliance period. The covered entity’s full compliance period compliance obligation in this situation is calculated as the total of the emissions that received a positive or qualified positive emissions data verification statement or were assigned emissions pursuant to section 95131 of MRR from all data years of the compliance period.
(c) A covered entity that initially exceeds the threshold in section 95812 in the second year of a compliance period is a covered entity for the second and any remaining years of this compliance period. The covered entity’s full compliance period compliance obligation in this situation is calculated as the total of the emissions that received a positive or qualified positive emissions data verification statement or were assigned emissions pursuant to section 95131 of MRR for the second and any remaining data years of the compliance period.
(d) A covered entity that initially exceeds the threshold in section 95812 in the final year of a later compliance period has a compliance obligation for its emissions that received a positive or qualified positive emissions data verification statement or were assigned emissions pursuant to section 95131 of MRR for that year, but the entity’s full compliance period compliance obligation for the current compliance period is not due the following year. Instead, the entity’s reported and verified or assigned emissions for this year will be added to the entity’s full compliance period obligation for the subsequent compliance period”
Not that our technocracy can’t handle complex systems. The Internet. The moon landing, James Webb telescope, & Large Hadron Collider. The multi-trillion-dollar global financial system. “Can we build it? Yes, we can! Most of the time….” – but there are important differences between building those technologies and tackling existential threats to survival.
Humans are likely to survive a meltdown of the Internet or the global financial system. The outcome of failing to mitigate climate is much more uncertain and the tail risk (even if very low probability) is extinction (infinite harm) or de-civilization (almost infinite.) So, is this Cap-and-Trade contraption the best way to reduce GHG emissions to maintain a habitable climate and global ecosystem within the limited time we have?
The bugs in the system are in fact features, machinations designed to satisfy the needs of the owners of the modern western industrialized consumer economy, who are only willing to mitigate environmental destruction if it satisfies shareholders.
This is discussed at length in a recent paper, “California’s ambitious greenhouse gas policies: Are they ambitious enough?” The paper is a deep dive into the myriad details of what can go wrong, or is already wrong, with C/T, deconstructing the perverse logic that gives us “the waterbed effect” and other counterproductive results.
It urges policy makers to devise a statewide plan that directly supports decarbonization across the entire economy, rather than the myopic (failed) market-price-based carbon mitigation approach more palatable to corporations.
A statewide decarbonization project on the scale and scope required for climate stabilization may be too big a job for CARB or the California government to take on…. Regulatory policy should accommodate, facilitate, and help coordinate complementary and independent climate actions in support of the state’s climate goals; it should not undermine and discourage such actions by nullifying their environmental benefits. A core objective of state policy should be to empower individuals, businesses, communities, and municipalities to influence the scale and pace of decarbonization through their collective actions and investment choices, and to reap the economic dividends accruing from their choices.
The Head of a Dead Cat
What does all this have to do with the Zen parable?
Not only does C/T as designed impede or deadlock decarbonization, but the most critical input to its economic model is also missing. Nowhere in the design of C/T economics is any value given to breathable air, manageable climate and weather, or any other natural resource. You can’t design a truly meaningful system to trade on the right to degrade the conditions under which all creatures have lived for the last tens of thousands to millions of years.
The best our industrialized academics have devised to price the habitable world is a thing called “The Social Cost of Carbon” (SCC.) An Internet search on this phrase will return pages and pages of studies – created by more of the same academics, economists, and industrialists who gave us C/T – in which they attempt to come up with a metric that someday can be plugged into equations of climate-survivability-as-long-as-it-doesn’t-cost-money.
But California’s C/T system design, just like the California electrical net-metering NEM3 design, doesn’t even attempt to include this. There is no SCC analysis in California’s C/T regulations.
The consulting firm E3 plays a conspicuous role in the climate-vs-economics modeling behind not only NEM3 and C/T for California but much of the country, yet the industrial-political-economic complex cannot put a price on the head of a dead cat, the air we breathe, the water we drink, or a survivable temperature range. The financial design philosophy behind C/T ignores the most valuable things in the world.
Call to Action
Public comment is closed, and the legislation is finished, so the work ahead is to exert influence on legislatures and CARB to evolve their vision of how decarbonization is best achieved, over the longer term.
Climate Reality members can be part of this effort by
- Subscribing to the C/T program email updates here.
- Reaching out to CARB members listed here and reporting on what they have to say about missteps and omissions mentioned here.
- Reaching out to E3’s Tory Clark or email E3 at [email protected] and see if there are answers to some of the hard questions.
- Reaching out to CARB’s Market Advisory Committee to vigorously lobby for changes due to the biases and omissions in the current plans.
- Reaching out to your legislators – though they have less influence over C/T and have delegated their responsibility to CARB.
And as always, post your leadership actions on the Hub!
Afterword
For more on whether California’s C/T plans include SCC criteria, Microsoft’s AI-powered search returned this result:
“According to the web results, California’s cap and trade regulation does not explicitly include “social cost of carbon” analysis. The social cost of carbon (SCC) is an estimate of the cost of the damages created by one extra ton of carbon dioxide emissions1. It is used to evaluate the benefits and costs of policies that affect greenhouse gas emissions2. California’s cap and trade program is designed to achieve the maximum feasible and cost-effective reductions in California greenhouse gas emissions3, but it does not use the SCC as a direct input. Instead, it sets a limit on emissions and allows regulated entities to trade allowances and offsets within that limit4.
Learn more
1. en.wikipedia.org 2. news.stanford.edu 3. arb.ca.gov 4. arb.ca.gov 5. edf.org 6. arb.ca.gov 7. carboncredits.com