Thursday, June 17, 2010

The Story of Cap and Trade: A Rebuttal

I know I need to respond to some emails and comments still. I also need to get back on the summer reading group horse. But, here is an off-topic post anyway.

While I was at the wedding my brother brought up Annie Leonard's short animated film, "The Story of Cap and Trade." Now, I know that I am well behind the curve here, but I hadn't seen the film before. So, I know that for many of you this is already a decided and done issue one way or another. I am also sure there are probably several more thorough responses out there, and maybe I should have just searched for them and linked here. Regardless, this video both angered and worried me, and I felt it deserved a direct response since I have come across it.

It angered me for the way it depicts supporters of cap and trade. Leonard at least implies (if not quite argues) that cap and trade was somehow developed by evil market speculators; like Enron, Goldman Sachs, and Bernie Madoff (wtf on this last one); and that supporters of cap and trade are either dupes or complicit co-conspirators in some new speculative bubble that puts all of us in danger. Whatever your feelings about the effectiveness of cap and trade to handle the problem of rapid global climate change, let's me honest: there are many tireless activists and policy wonks who are fighting for cap and trade and they are not delusional, duped, greedy, or complicit. And many of them not only think cap and trade is the best thing we can get through Congress, they think that a well designed cap and trade program is an essential component of any bill to fight global warming. You can disagree with them without turning them into villains or idiots. Many people on the right, like the Heritage Foundation, are opposed to cap and trade, but I don't claim that Annie Leonard is in league or been duped by the far right. It would be both irresponsible and mean-spirited to do so.
So, cap and trade doesn't get birthed from speculative traders, where does it come from? You won't learn this in something called The Story of Cap and Trade, so let me elucidate. The original cap and trade system was first installed in the 1990 Clean Air Act (which is valorized in this program). If you remember at the time there was a fear of Acid Rain caused by too much production of SO2 and NOx. Both SO2 and NOx were put under a cap and trade program, and it was an amazing success. Levels were reduced far more quickly than anticipated, and for far less than anticipated. We have seen this idea expanded to carbon in the European Union in 2005 and in a regional program in the Northeast US.
What does all of this tell us? It tells us that cap and trade was invented by scientists and policy wonks, it has a record of success and models that we can investigate to make better policy, and it seems politically feasible. The roles of speculative marketers to promote cap and trade are rather marginal to this story, whereas they are central to the story that Leonard tells.

So, that's why it angers me, it worries me because Leonard's video frequently misleads or tells only part of the story. I think if we who are concerned about the environment and ecology depend on information like this, we cannot begin to have the sort of conversations necessary to figure out what is best. So, here are some responses to her video:

(1) It seems to be working in Europe. Leonard points out how rocky the beginning of cap and trade was in Europe. It did result in price fluctuations, and too many permits were given away at the beginning. However, Europe's system was designed in phases, so that things could be fixed. And sure enough, since Phase II began in 2007, things have gotten better. As this German Marshall Fund report (.pdf) explains, much of Europe is set to meet their Kyoto goals because of cap and trade. Indeed, cap and trade seems to be reducing between 2.5 and 5% of carbon annually from Europe. Moreover, prices have largely stabilized.

(2) I think everyone agrees that fully auctioned permits is the best idea for cap and trade. It is unclear from the video if Leonard would be for a system that had fully auctioned permits and strong regulations on offsets. She nowhere says she would be, even though her two concrete problems with cap and trade can be fixed by stronger bills, they are not inherent to the system itself. Anyway, fully auctioned credits would be best. The bill that passed the House a while back, Waxman-Markey, took a hybrid approach to this issue. It gives away most of the permits to begin with, and then gives away less and less of them over time. Moreover, most of permits given away are given away to protect consumer interests, not polluter interests. Would a fully auction system be better? Of course! But better for what? For reducing carbon? That seems unlikely, the cap is the main thing that decides that. So, the auctioned credits are a way of raising revenue, and that strikes most of us as important and good. But it is unclear why Leonard implies that it would make matters worse for the planet if we gave away permits rather than auctioning them off.

(3) The issue of offsets is one that I share a certain amount of skepticism over. And in this case I can see why a system with bad or unregulated offsets might make a system that is worse (though hard to see how it is worse than the status quo) but at least a system that wouldn't be effective enough. My understanding is that Waxman-Markey do a lot to make sure that offsets are abused. This is something I don't know nearly enough about, and am open to learning more. I do know that one of the reasons that offsets are seen as a possible benefit is to jumpstart international action. Basically companies in the US could bribe countries and companies in the rest of the world to act in ways that are important for lowering carbon emissions. To install methane captures and to stop destroying rain forests. But this is something I am skeptical of, and not fully on board with.

(4) Leonard implies that the US starting to tackle carbon emissions itself will somehow undermine international cooperation. I don't even begin to understand this argument. How can us showing that we are serious about tackling carbon emissions make us less serious on the international scene? Wouldn't the opposite be true? Moreover, how do any of her solutions help international confidence? Paul Krugman has suggested two ways with dealing with carbon emissions in the other world (this whole article is worth reading). The first is that if we set up an international market for the cap and trade, then countries that produce less carbon would have more permits to sell. In short, companies form the EU and US would pay companies in China, India, Brazil, etc not to produce carbon. A fairly direct bribery scheme. Another possibility is to enact carbon tariffs. Neither of these are perfect solutions, but I remain confused how focusing on passing a workable national cap and trade program is a distraction from international solutions.

(5) Leonard makes two more arguments for cap and trade as dangerous distraction. The first is that the EPA can somehow cap carbon emissions. Well, it can regulate carbon as a pollutant, but it is unclear how it can cap industry specific carbon emissions. Moreover, the EPA's enforcement will be up for grabs each time the white house changes hands. A law that compels enforcement and sets specific guidelines for caping is far more effective for large scale and continuous change. Now, it is true that some of the cap and trade bills proposed will weaken the EPA's ability to regulate carbon unilateritality. That's not great, but if we get a strong enough bill out of congress it will be worth it. The other argument is that it will make people complacent. If we are actually caping carbon, I don't understand what you want people to be doing. Now, there are ecological issues outside of rapid global climate change, but I don't see how a carbon cap and trade will make us care less about those issues. It is true that an effective cap and trade destroys the meaning of individual actions when it comes to carbon. Deciding to produce less carbon will (seldom) matter because if you produce less it gives room for someone else to produce more. This is either a feature or a bug of the system, depending on who you are. Either you feel this will destroy individual morality, or you feel that a system that doesn't require self-conscious sacrifice but systematic changes is a better thing is up in the air from an ethical perspective. From a getting stuff done perspective, I'd prefer an effective systematic changes.

(6) Cap with no trade strikes me as somewhat problematic. First of all, I don't see the added benefit. If the caps are the same, we would be reducing carbon at the same rate. On the other hand, without trade it would produce much higher costs on consumers. That has its own set of problems. Also, just as I am wary of an unregulated market, I am also wary of the government, of centralized planning. I think we need a system that allows a degree of flexibility internally with a hard cap externally. I guess being for cap without trade makes sense if you are inherently opposed to all markets. The fact that Leonard only speaks in terms of ponzi schemes, bubbles, etc. makes it clear that she seems opposed to all speculative markets. I'm not sure I am, or at least certainly not to the degree I'd be for giving up an effective global warming opposition. As Paul Krugman explains why cap and trade doesn't lend itself to the sort of speculation that Leonard's language emphasis. Seriously, being opposed to the trade of cap and trade only makes sense if you are opposed to all trading, to the trading of wheat futures for example. Also, there is has been no gaming the market system of SO2 cap and trade (.pdf), and no evidence of any gaming the US regional carbon cap and trade (.doc). I don't know about problems of gaming the EU system, and if any of you know I'd be interested. Ultimately my view of markets are similar as those put forward by Braudel in Capitalism and Civilization and Delanda's Braudelian view in A Thousand Years of Non-Linear History. Basically, that markets are powerful and productive. The real problem isn't with markets, but with anti-markets trying to pass themselves off as markets. The creation of an actual market with cap and trade strikes me as beneficial addition to the policy.

At the end, this is a complex issue. Leonard is right that some of the people who first devised cap and trade to handle acid rain are worried about its effectiveness to handle carbon. There are a lot of problems and potholes to be dealt with. But "The Story of Cap and Trade" seems more devoted to rallying troops than it does to grapple with complex issues. That's not at all what we need.