I love reading Matt Taibbi. I mean, who else puts together a sentence like this?:
The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
Funny and righteous at the same time. Good stuff. But in a piece he wrote for Rolling Stone this past July, he made some awfully curious—and curiously unsupported—allegations about carbon markets:
…if the Democratic Party that [Goldman-Sachs] gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.
Yikes. It’s pretty scary stuff, but Taibbi doesn’t elaborate. At all.
Which is frustrating.
It’s frustrating because this is precisely the kind of thing you hear all the time from cap and trade critics. Taibbi’s telling a big hairy ghost story here, but because he doesn’t explain it we can’t know whether to be spooked or just laugh it off. At minimum, somebody needs to explain how it is that a carbon-credit market will replicate the commodities market in ways that make it eligible for gaming by Goldman or others. And then someone needs to explain why that risk—if it’s even true—is worse than the risk of failing to cap carbon.
That’s where Paul Krugman comes in.
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In his NYT blog, also this past July, Krugman penned what I thought was a terrific rhetorical response to this kind of thinking:
…there’s also, it seems, growing opposition to cap-and-trade from people who should be on the side of progress—but whose reaction is basically “Eek! Markets! Wall Street! Speculation! Bad!”
Any time you have a market, there’s some opportunity for speculation… For example, the fact that wheat is traded means that there’s also a wheat futures market; and because wheat can be stored, futures prices affect spot prices.
So, should fear of speculation lead us to ban trading in wheat? Nobody would say that. Yes, sometimes speculators will get it wrong—but the advantages of having a wheat market vastly overshadow the possible harm that may sometimes come from speculation.
Nowsubstitute “emission permits” for wheat. It’s exactly the same story.
Krugman goes on to address a couple of related concerns. A carbon market will not be like the Enron-manipulated energy markets for a couple of important reasons. And carbon speculation wouldn’t replicate the 2008 commodities price surge because, according to Krugman, that price surge wasn’t actually driven by speculation. But even if you think the prices were speculation-driven, Krugman points out that pretty much no one wants to shutter commodities markets.
Instead, the proper solution to market manipulation is market regulation, not banning markets. Toward that end, it should be comforting to see robust legislative programs for regulating carbon markets, such as the Feinstein-Snowe Carbon Market Oversight Act of 2009, which Lisa has already written about, not to mention the stringent regulatory provisions included in the Clean Energy Jobs Act, the primary cap-and-trade vehicle in the US Senate.
Not that there isn’t more to do, perhaps. Carbon market oversight will be critical to the success of a cap-and-trade program. So rather than engaging in speculative market-bashing, I’m hoping that progressives will get to work on designing smart market regulations.
Interesting and well done. But why not avoid the speculation altogether with a revenue-neutral carbon tax?
Wheat is a terrible analogy, because here in Canada we have a wheat board that sets prices.
I gotta admit, much as I love trying to keep up with all this geek-analysis of something as complicated as cap-and-trade, a self-declared non-geek like me truly wonders if it could all just be boiled down to something as SIMPLE as:Pollution = BADPolluters will be FINED for the EXACT AMOUNT they pollute.NO TRADING ALLOWED.So, FESS UP NOW!
For the Banksters and other criminals, the ability to game cap-and-trade isn’t a bug, it’s the main desirable feature. As for telling people that their concerns are bunk unless they can describe exactly how the system will be gamed, that’s called ignoring history. Did we need to anticipate hedge funds, program trading, and the corruption of bond raters to know that repealing Glass-Stegall was a bad idea? Just because not every needlessly complex, Rube Goldberg contraption can be picked apart in advance doesn’t mean that a bias against Rube Goldberg contraptions is a bad thing.For pollutants only emitted by a tiny handful of facilities—SOx, for example—cap-and-trade has merit. For carbon, however, cap and trade is like trying to build a 747-sized bumble bee and say “It ought to fly, the bumble bee does, and unless you can prove, in advance, that it won’t, then we need to make a massive commitment to building this jumbo jet-sized bumble bee to the exclusion of much simpler, understandable, and comprehensive solutions like carbon taxes.”
Precisely.Which is why we here in the U.S. have a terrific vantage-point for OBJECTIVELY observing how cap-and-trade is working/not working in other countries that are trying to fly this over-sized bumblebee jet.Surely we can come up with something more viable and svelt, sans any nonsense.Moral of the story: If it’s too difficult to explain, then it’s too difficult to regulate. Keep it simple and transparent, and everyone wins.
I’m a firm believer in KISS. I don’t believe Cap and Trade comes close to that philosophy. However, by creating a Carbon Credit Industry your creating the one thing this Economy needs most right now…Jobs (and I need one). That I think is the major push for this policy going forward, and, oh yeah a desire to ween ourselves off Fossil fuels. But we have to ask ourselves are these the kinds of Jobs we want? Look at the Credit Default Swap Business, it’s just massive in size and scale (measured in Trillions of Dollars) in just the last ten years or so. It employs tens of thousands of people, maybe hundreds. But are these the kinds of Jobs we want? Buffets partner at Berkshire said it best when he said `The Country functioned just fine without Credit Default Swaps for a long time’. Do we need Carbon Credit Trading or Cap and Trade? No we do not. I am quite sure there are better ways to get this Country moving away from it’s dependence on Fossil fuels. With respect to Market Manipulation. I worked on the `Street’ for a long time (I don’t anymore). Yes, there is excessive greed. When your dealing in the numbers they deal in it’s only natural that some will step over the line. Taibbi points the finger at Goldman Sachs as a Market Manipulator, I was never a fan of theirs when I was on the Street (they never needed outside help). But I’ll bet that 99.9% of everything Goldman does is within the letter of the Law. They are just better at Trading than everyone else, much better.
Carbon trading creates no more jobs than digging up dirt to make holes and then filling the holes would. Carbon taxes as part of a green tax shift (reduce income and payroll taxes as you increase carbon taxes) creates far more real jobs that produce real value than any amount of pixel-pushing.
We need a carbon tax but we think it isn’t politically viable. We need to revist the classics and think about the importance of free will and the human spirit.
Heartily agreed, Dan. Trouble is, free will also involves messing things up. And someone has to clean up the mess. If the one who made the mess is the one who cleans it up, then everything’s fine. However, when the mess is just “traded around,” then time is wasted, messes continually get made, and, ultimately, there is no real progress in the end, it seems.
Readers here seem concerned about complexity in markets. It’s not that complex if we set the system up in a simple way. I agree with Krugman – it’s like wheat. The weat market isn’t for sissies, but it’s not hard to understand. The emmissions market can be just as simple, and just as easy to lose your shirt in. People have been losing (and making) money with commodities futures since they started selling agricultural products to someone more than a day’s travel away.The only reason emmissions credits are worth trading is because there aren’t enough of them to satisfy all the people who want to pollute. We sell fewer and fewer of them every year and drive the price up. Eventually some people decide that it’s cheaper to stop polluting than it is to buy the credits. In the beginning the people who decide to stop are people for whom the effort required to stop polluting isn’t all that hard. Eventually polluters that can’t stop go out of business. I think it makes more sense than a carbon tax – it damages the economy less and is actually doable, which I don’t believe a carbon tax would be in the USA, and certainly not in Washington State.State Rep. Ross HunterFinance Committee Chairman
Rep. Hunter, I hope you understand that, to the extent that a cap and trade plan could theoretically work at all, it would work by raising the price of emissions, just as a carbon tax would do.Meanwhile, what the carbon tax is not vulnerable to and cap and trade is are problems with phony offsets, which are legion. Unlike wheat, the “right to pollute” is an intangible commodity that can be double and triple counted and that creates a huge dead-weight burden to manage to try and limit double and triple counting and to verify.Everything you said in your second paragraph about carbon trading persuading people to reduce emissions is true for carbon taxes—the first people to cut emissions will be those for whom cuts are easiest, etc. Again, all analyses show that the IDEAL cap and trade system functions like a carbon tax—except that the carbon taxes have much less administrative overhead, much less opportunity for games/ cheating, and automatically include all carbon sources rather than just big industrials, so the tax required to accomplish the goal is lessened (since it’s applied over a wider basis). We’ve already seen that cap and trade creates huge distortions and rent-seeking, as Big Ag got itself exempted already thanks to lobbying power. Thus, one of the sectors with the greatest emissions is going to sit outside the cap and trade game in the first place, making the whole effort little more than a Potemkin Village of “reform.”The true hallmark of how ripe cap and trade is for scams and avoidance is how many financiers and investors are supporting cap and trade rather than a carbon tax. These people didn’t suddenly get religion on climate change—they simply see that there are going to be boundless opportunities to pervert the system and profit thereby when intangible commodities are turned into instant wealth tickets for big players.
Funny, right after I posted the response to Rep. Hunter, this came in my email box—a testament to the monumental relative complexity of cap and trade schemes over much simpler, transparent carbon taxes:<blockquote>What: “Carbon Credits” SeminarWhen: November 12, 2009Where: World Trade Center—Portland, ORJoin Program co-chairs David Ashton, Port of Portland; Sally Brick, K Gates LLP; Michael Nesteroff, Lane Powell, PC; and Thomas Wood, Stoel Rives LLP, along with these representatives from state and local governments, businesses, and private practitioners as they cover these topics:Keynote Presentation by Sallie Schullinger-Krause: Mandatory Carbon Emissions ReportingCap and Trade 101Mandatory Markets vs. Voluntary MarketsFederal IssuesRegional Carbon Trading Initiatives and Complementary MeasuresClimate Change Financial Disclosure StandardsEffect of Carbon Regulation on Regional and Local IndustriesWant to promote your company by becoming a Sponsor of this seminar? Call The Seminar Group at 800-574-4852 for more information. Credits: Oregon State Bar – 6.75 General CLE CreditsWashington State Bar Association – 6.25 General CLE CreditsTo view the full agenda, which includes registration information and pricing, go to the link below. To register over the phone, or if you have any questions please call us at 800-574-4852. View Agenda, Faculty, and Pricing or Register Now Thanks, hope to see you there, The Seminar Group P.O. Box 523 Vashon, WA 98070 </blockquote>
In one of his comments above, John Gear brings up an excellent point about tax shifting:”Carbon taxes as part of a green tax shift (reduce income and payroll taxes as you increase carbon taxes) creates far more real jobs that produce real value than any amount of pixel-pushing.”The present time is ripe for tax-shifting advocates to promote this profitable idea, as presented in Sightline’s brilliant book, “Tax Shift.”Let’s face it. Pollution is a toxic asset. Tax shifting is the best way to clean up its act.
Since Matt Taibbi didn’t elaborate on cap-and-trade, I will. Financial firms are the casino, because they will aggregate carbon offsets and allowances into pools to create carbon emissions backed securities and take management fees for those pools. They would also have the power to chose the carbon offsets they will aggregate and will choose the most profitable ones. They can slice up the pools and sell these emissions backed securities to firms as carbon offsets, but can hide the effectiveness and compliance of those offsets. If you doubt this, even with mortgages, many home owners can’t offset find out who owns their home, much less what mortgage pool they went into. Heck, they could even hire their own carbon emissions rating agencies—who, guess what—rates their pools as high quality offsets. Financial firms can trade against volatility with momentum trading and arbitrage. They can also buy emitters to get direct access to the auction markets. Think not? That’s how Salomon Brothers got access to the oil markets.But what value does cap-and-trade add? nothing, really, Actually, the global financial firms can take a profitable cut from all carbon emissions credits, likely a multi-trillion dollar market. A straight carbon tax would be more efficient and far less prone to fraud. So, politicians have a dilemma: Do they succumb to the arguably largest potential for corruption in democratic history, or do they act for the good of the public and the planet. Tough choice.