Thursday, July 16, 2009

What's This Cap-and-Trade Business?:: In the US, It's All About Business

On ThickCulture, I blogged about the BC carbon tax, which was implemented by the Gordon Campbell's BC-Liberal {centre-right} government. The BC carbon tax was revenue neutral, where the taxes were collected at the point of consumption, but reallocated on the basis of income. The NDP {centre-left} used the unpopular carbon tax as a wedge issue in the May 2009 election and were hammered by environmentalists. Historically, the carbon tax has one success story:: Denmark. Monica Prasad at Northwestern claims that Denmark was able to do it through subsidizing private sector innovations and heavy investing in alternatives. I don't think these strategies are limited to the carbon tax and can also be applied to cap-and-trade. The NDP in BC and at the federal level support a cap-and-trade system, which is also favoured by the Obama administration. Jack Layton, NDP leader, last fall criticized the carbon tax, stating the NDP position of::
  1. targets the big polluters
  2. creates incentives to radically reduce carbon production
  3. consumer protection against energy price gouging
This was in contrast to the pro-carbon tax stances of Stephane Dion and do nothing approach of Stephen Harper. Meanwhile, in the US, a legislative bill {HR 2454}, the Waxman-Markey climate change bill was introduced, which would create a cap-and-trade system. In essence, this would create a new financial market, a market that likely will have two features::
  1. Price volatility {quantity of pollution is set, so price fluctuates, often wildly}
  2. Encourages financial speculation {wild fluctuations create incentives for financial, not environmental, innovations to hedge risk given price volatility}
In essence, this opens the door for a new market system to be created that mirrors that of the subprime mortgages. This brings up the issue of regulation and fraud, in terms of both environmental and financial practices. The following video {} explains how cap-and-trade creates a primary market for carbon, but a secondary market {derivatives} for carbon futures, given price volatility::

As economic sociology would predict, the system is being shaped by those with vested interests in carbon heavy energy production. While economist Paul Krugman in the NYTimes talks about cap-and-trade as an innovation incentive, he's talking theoretically. Part of Waxman-Markey is the allowance of $2B US in carbon offsets, which allows for a greater level of carbon pollution if a firm has a future innovative project that is projected to reduce carbons. Why would Waxman do this? Simply put, he needed the votes. The reality is that these future projects aren't always new or innovative, which, in effect, allows for more carbon pollution without creating new innovative technologies. The system can be rigged to allow for workarounds that preserve to a certain extent the carbon status quo. This video {via} explains the carbon offset problem and how offsets can allow coal {accounting for 50% of US electricity generation} to be utilized in the US for the foreseeable future::

I'm not against market-based solutions, but I'm concerned when policies are implemented without adequately addressing market structure and expected behaviors. I also think that there are limitations to what the market can do, particularly in terms of spurring the development of new technologies. I tend to agree with the Brookings Institute's analysis of Waxman-Markey. I feel that more needs to be done to actively create alternatives to carbon-heavy energy production.
"pricing and regulatory responses won’t by themselves get America where its needs to go when it comes to decarbonizing the world economy. In addition, America and the world need to catalyze—with large government research interventions—radical scientific and technological breakthroughs and their commercialization."
What about Canada? Canada is slipping in it's environmental scorecard. An Ecofys report listed Canada as last in the G8 on climate change action, thanks to increases in greenhouse gas and per-capita emissions. It's likely that future Canadian emissions policies will be cap-and-trade based, as it's been shown to be palatable to the business community, particularly due to offsets. That doesn't mean that Canada should follow the path of the US and perhaps should be looking towards approaches by other countries, particularly with respect to innovation policies. Stephen Harper is paying lip-service to this in terms of green energy and green technology, but at the end of the day, his focus is on Canadian resource endowments and market-based mechanisms. Ignatieff promises a cap-and-trade policy by the end of the year. Elizabeth May and the Greens supported a carbon tax approach last year, while Bloc Québecois was in favour of cap-and-trade. Jack Layton's NDP is still advocating a cap and trade system. Politically, I agree with greenpolicyprof that future Canadian policy should coalesce around a cap-and-trade framework, but one that factors in Layton's concerns, focuses on innovation, is appropriately regulated, and doesn't bend to political pressures, hamstringing the policy from the start.

Twitterversion:: What's This Cap-and-Trade Business?US going one way, but can Canada learn from this? Implications for #Canada & #Canpoli. @Prof_K

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