Cap and Profit
Europe’s example is nothing to emulate
by Peter DeFazio
This paper published an opinion piece on June 4 (“The best option among flawed choices?”). The author (Erin Noble) described cap and trade as efficiently and politically viable and said Congress need only look to Europe as an example to bypass any mistakes for an American version of cap and trade.
With the exception of Mr. Noble, most analysts deem Europe’s cap and trade plan a failure. Emissions on the continent have risen every single year under cap and trade. Meanwhile, costs to consumers have skyrocketed while speculators and hedgers trade $60 billion worth of pollution allowances annually in a lucrative market.
So, what did Europe get wrong?
First, it gave away pollution allowances to industry for free based on historical emission levels. A fairer approach would have been to auction the allowances to the highest bidder. This would have generated billions in revenues that could have been used to assist consumers with rising energy costs and to invest in cleaner technology.
Second, Europe deregulated its carbon market, allowing speculators to buy, trade and sell allowances. But speculators, hedgers and investment banks aren’t in the market to reduce emissions; their bottom line is maximum profits (remember credit default swaps?). With speculators come market manipulation, profiteering and higher costs to consumers without benefits.
Third, Europe allowed polluters to use “offsets” to meet emission targets. An example of an offset is a promise to plant trees in Indonesia. Polluters can “buy” the potential carbon stored by the trees, claim it as a pollution credit and apply it to their emission cap. This allows polluters to forego any meaningful change in behavior since there are endless “offset” possibilities.
As Congress moves forward with cap and trade in the U.S. (as planned in the Waxman-Markey bill), you’d expect we would at least attempt to avoid the pitfalls experienced by Europe. But we haven’t learned our lesson. Instead, we’re heading down the same road.
As in Europe, the Waxman-Markey bill also gives away most allowances to polluters free of charge. Total giveaways to industry are estimated to be $821 billion over the first seven years of cap and trade alone. Again, an auction would have been more efficient and fair. But the government trusts the energy industry to “pass through” the benefits of the $821 billion to consumers. This from the same industry that produced Enron.
As in Europe, the Waxman-Markey bill allows speculators into the pollution market. This provides Wall Street with enormous opportunities to game the system. We should expect new exotic financial products, new derivative markets and volatile prices for allowances. Merrill Lynch recently predicted the carbon market created by a cap and trade will be the fastest growing market in history, with volumes comparable to credit derivatives ($35 trillion) within a decade. Get ready for the “carbon bubble.”
As in Europe, the Waxman-Markey bill relies on dubious offsets to meet emission targets. The bill allows polluters to buy up to two billion offsets per year before actually having to change their business-as-usual emissions. In fact, the combination of offsets and free allocation of allowances potentially delays any reduction in emissions until 2025. We can’t wait 15 years before cutting GHG emissions.
I’m old fashioned. I think a better approach is to regulate. We should cap GHG emissions, establish a schedule for reductions and fine polluters that don’t meet the standards (see my alternative, HR 1683). This is the approach we used under the Clean Water Act to clean up our rivers, waterways and streams. It was phenomenally successful and didn’t involve the added costs of obscene profits for Wall Street speculators.
Peter DeFazio of Springfield is a congressman representing the 4th District. He can be contacted at (202) 226-5740 or through www.defazio.house.gov