THE OVERSIMPLE STORY OF CAP&TRADE AND THE FACTS

The Story of Cap & Trade, from Annie Leonard and the talented makers of The Story of Stuff, is spreading virally through the web and finding quick approval from folks who distrust the supposed complexities and Wall Street dangers of cap&trade.

Perceptive simplicity is always appealing and The Story of Stuff was very appealing and a superbly spot-on critique of wasteful Western materialism but this one is simply oversimplified.

From storyofstuffproject via YouTube

Ms. Leonard gets her first point, the basic idea of the cap, exactly right: The cap in cap&trade is the crucial element that makes the whole concept so important. The first and foremost thing the world needs to do is set hard caps on greenhouse gas emissions (GhGs).

But the trading part of cap&trade, contrary to the video narrative’s next assertion, is not any more of a scam than any other market. By the time cap&trade gets on the U.S. stage and goes worldwide, it will have many more checks and balances and regulatory protections built into it than most markets.

What the video narrative does not mention is that permits to spew, called allowances, will only be free for the big emitting industries in the earliest stages of the proposed U.S. cap&trade system. This, yes, makes it financially appealing for them to participate. Like it or not, and NewEnergyNews likes it no more than Ms. Leonard does, the fight against climate change will succeed or fail only to the extent of the big emitters’ participation. Giving them a means to benefit as they incur the costs of transitioning to New Energy and Energy Efficiency gives the world a fighting chance, even if it makes the process seem, in the early stages, a bit like the heinous medieval practice of buying indulgences.

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Europe’s system, the European Union Emissions Trading Scheme was flawed and faltered as it was being invented between 2005 and 2007 but it has worked as well as any other market in the last 2 years and the EU’s GhGs went down in 2007 even while its economy was expanding.

Too many ETS allowances were given to the big emitters in the 2005-to-2007 phase and, through careful manipulation, the power companies and other big emitters, yes, were able to profit from them. Because of the unforeseen economic downturn in 2008-09, they may continue to profit for a while (although the EU system has corrective mechanisms and is studying interventions).

Eventually, however, the economy will come back, larger and larger portions of the allowances will cost the big emitters more and more and, as the market solidifies, there will be costs to drive even the biggest, richest emitters toward New Energy and Energy Efficiency and there will be revenues available to relieve citizens hurt by rising energy prices.

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Contrary to the video’s assertion, the cap&trade program DOES include funding to ease the burdens of the transition to slightly more expensive energy domestically and for GhG-cutting projects in the developing world. Unbiased studies by several federal agencies indicate such funding will effectively protect the most affected U.S. ratepayers and taxpayers. The revenues will be handled through the federal budget in the same way as any of the alternate and politically untenable methods of cutting emissions suggested later in the video.

As to the mechanism to fund developing world initiatives, the video eventually gets around to criticizing the very concept of international offsets it asserts is so necessary. It is hardly a perfect mechanism but the "simple" nature of the video allows Ms. Leonard to neglect mentioning Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (REDD) and the other enormous worldwide efforts to make international offsets a more perfect method of protecting the world's forests and the world's poor. (See below.)

Such protections are necessary. They must be made to work. Because putting a price on emissions is likely to drive energy prices up. Putting a price on emissions, however, is the only way to level the playing field for the New Energies against the Old Energies, their established infrastructure, markets and supply chains and their entrenched and well-protected subsidies. Though there might be more ideal methods of putting a price on GhGs, cap&trade is the only method that has any political possibility of being put in place in the short-term – and the short-term is when the world must get to work capping and reducing emissions and building a New Energy economy.

From NationalWildlife via YouTube

A suggested more perfect way to manage emissions might be a “carbon tax” that sharply penalizes heavy emitters. The revenues could, conceivably, be redistributed to protect those who would otherwise be hard hit by the high energy prices that would come with such a tax. Such a carbon tax might be simpler than a cap&trade system but anybody who hires an accountant to do their income taxes knows a tax system is far from simple.

Most importantly, a carbon tax is not now politically possible. That is why it is largely advocated by people outside the political system (like academic economists, scientists and political purists of the farther left and right) and by those who oppose putting a price on emissions, like politicians from fossil fuel-dependent states and the CEOs of the most recalcitrant and biggest-emitting businesses (like Big Oil and Big Coal).

Those who understand the limits of the world community’s early and tenuous governance system, in which a wide variety of players with a wide variety of agendas are gathered, understand there are limits to what can be accomplished now. For those who understand the urgency of global climate change, it is easy to be impatient and intolerant of that system.

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Both President Obama and Al Gore, who clearly understand both the urgency of climate change and the complexity of the political circumstances, are committed to cap&trade in the short-term and much more stringent measures, like a carbon tax, in the longer term.

Picking up on the narrative of the video again, there have been problems with international offsets but work has been done and is being done to improve the United Nations’ Clean Develop Mechanism (CDM), the system through which they are most reliably sold. At worst, selling offsets transfers wealth to the developing world that will eventually, even if slowly and imperfectly, move the whole process in the right direction. Holding out for a more perfect solution will only slow the process of protecting the forests of the developing world and moving them toward New Energy. What the CDM needs and is implementing is progressively more effective oversight.

In the video, Ms. Leonard says a cap&trade system is a bad idea because the world is nowhere near agreement on caps. That is simply not true. It is true there are fundamental differences between the big developed nations and the big emerging economies like China, India, Brazil and Indonesia. But there are also points of agreement between them, the biggest and most important of which is that climate change is a serious threat.

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Further agreement centers on the need to cut GhGs and build New Energy and Energy Efficiency. Disagreement centers largely on who will cut emissions how much and when and who will pay. Many believe there is an enormous opportunity to strike a strategic agreement. Whether they are right will become clear in the next 10 days in Copenhagen.

What appears to be in reach in Copenhagen right now is not a complete solution and those who expect one will certainly be expressing cynicism around December 18-19. There are passionate advocates for action against climate change who are on record in calling for failure from the U.N. conference. The question everyone, including NewEnergyNews and Annie Leonard, must ask is this: What is the most effective thing thing the world can now do to sustain the fight against climate change?

Returning to the video: Ms. Leonard is entirely right about the Clean Air Act (CAA) BUT once again reveals something…what? Political naivete? A disdain for complexities? The Progressive’s failure to grasp the sophistication of its opposition? NewEnergyNews does not know Ms. Leonard well-enough to judge. Perhaps she has more insight into the turning of the wheels of power than NewEnergyNews and sees a way that rejecting what is presently possible will open the door for what is now beyond reach.

A much better concept that will never get out of Congress. (click to enlarge)

Once the Environmental Protection Agency (EPA) is forced, for lack of a cap&trade agreement, to initiate legal action on the basis of the CAA, expect years of legal encumberments, absolutely no progress on GhG cuts and a slowed U.S. effort at building a New Energy and Energy Efficiency infrastructure.

Rejecting cap&trade will not only satisfy Progressives. It will please Big Oil and Big Coal, who have been crying “please don’t throw us into the briar patch and we need a carbon tax” as loudly as they can for the last 2-to-3 years. They prefer ti call for the politcally impossible and take their chances with the EPA because they know that as long as their lawyers can keep the EPA tied up in court, they can go on spewing.

Cap&Trade does not protect business-as-usual (BAU), it is the only politically viable lever to open the doorway to the New Energy economy. Once it is opened with the hard caps on GhGs that come with cap&trade, NewEnergyNews will continue to stand with Ms. Leonard and Progressives, this nation’s most important political force, in demanding NoMoreCoal, NoMoreNuclear, NoMoreWaste and a New Energy economy.

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One more point about the Clean Air Act: It cannot be said too strongly that completely sacrificing EPA’s right to use the CAA against GhG-emitters is too high a price to pay for climate change legislation. There must be a compromise or a backup strategy on that provision. It is untenable and absurd, like giving up the First Amendment for the right to publish Joyce’s Ulysses.

The last part of the video’s message is really powerful: We can’t solve the daunting challenge of climate change with “the mindset that got us into this.”

The only way to go forward is to learn from the mistakes of the past. That’s how the EU has worked through the ETS’s earliest problems. It cut back on the amount of free allowances to big emitters over time to stabilize the price. It is currently working out ways to deal with the oversupply of allowances created when the world economy crashed and allowance prices again fell.

The ETS's most recent problem is with something called a carousel fraud (missing trader fraud). It was a hustle first used in Europe on the trade of cell phones. Just as the EU did not abandon cell phones (and now is among the leaders in cellular technology), it does not intend to abandon emissions trading but to fix the problem.

The progressive activists of Sandbag in the UK believe there is a way to fix the ETS instead of abandoning it. (click to enlarge)

The 2008-09 financial crash is most directly associated with financial derivatives and a failure of regulation. It is already clear the proposed emissions trading market will not allow derivatives to be attached to emissions allowances. The market will be carefully and attentively overseen by the Environmental Protection Agency (EPA) and the Commodities Futures Trading Commission (CFTC).

Does this mean there will be no way to game the system? Bernie Madoff proved it is possible to game the most venerable investment markets in the world. Does that mean it is necessary to shut down the New York Stock Exchange?

There is no chance there won’t be smart hustlers who will do unconscionable things with other peoples’ money for illegal gains in the emissions trading markets. Does that mean the whole concept is invalid or does that mean it is necessary to be vigilant? That’s the crucial question.

Administrators at the UNFCCC are striving to make offset standards more rigorous. (click to enlarge)

The first Bush administration saw it was a potentially disastrous idea to take the first Gulf War to Baghdad and didn’t. Instead, the world sanctioned Saddam and instituted the oil-for-food program. Saddam endured by corrupting the oil-for-food program.

The second Bush administration used the failure of the corrupted oil-for-food program as an excuse to bypass the “they got us into it” solution and go for the perfect solution.

Could effective oversight of oil-for-food have prevented the Iraq War? (click to enlarge)

Question: Would there ever have been an Iraq War if the world had made the oil-for-food program work instead allowing it to become a “scam?”

So, was it a mistake to try an oil-for-food program? Or was the mistake in not making the oil-for-food program effective enough to do what it was designed to do, bring down Saddam?

Cap&Trade is the only option that can be put to work very soon. It is a market-based system that brings together significant elements of the business and environmental communities. It worked in the smaller context of the SO2 market that significantly contributed to solving the acid ran problem and CAN be made to contribute to the effort to turn back global climate change.

The are important differences between acid rain and climate change but the system can be adapted. (click to enlarge)

Climate change is an enormous and complicated challenge involving the entire world and every color of the world’s spectrum. It is not going to be solved by something simple.

Climate scientists might still be voices crying unheard in the storm if Al Gore had not brought them to the national stage and, unlike the climate scientists who are enjoying the luxury of being idealists and agitating from outside the complicated political system, Gore is still advocating for what is possible and taking the heat for it. (click to enlarge)

Cap&Trade has lots of things in it:
(1) Hard caps,
(2) economic incentives to move to New Energy and Energy Efficiency,
(3) international offsets to bring the developing world into the program,
(4) economic enticements to participate, turning into
(5) economic penalties over time for not participating,
(6) effective regulation of the emissions market and the offset program,
(7) redistribution of revenues from the sale of allowances and international offsets to make the program equitable for those most hurt by the burdens of more expensive energy.

It also allows room to bring on more perfect measures such as taxes and dividends if and when they become politically viable.

The only thing it lacks is the world’s will to make it and make it work. Is it foolish to think that could happen? If so, protest as much as possible. And move inland.