February 20, 2009 - Cap and Trade and Smoke and Mirrors

It's been an intense week on a couple of e-mail list serves discussing cap and trade. For today's blog, I suggest we agree to set aside the debate on how to read scientific papers related to climate change data. We are not likely to reach consensus any time soon. For purposes of discussion, I agree to stipulate that anthropogenic carbon in the atmosphere is more than a trace gas and that reducing it will actually have an impact on a process recently described by a noted climatologist as irreversible (couldn’t help getting in one last little dig!).

Focusing on cap and trade, the manipulation of the cap and trade process for financial gain rather than actual impact on carbon in the atmosphere must not be understated. A pivotal conversation for me was hearing from a former DC lobbyist who found himself working with a multi-national energy company which was positioning itself to take full financial advantage and to manipulate the future market for trading carbon offsets. The lobbyist quit after three months (thus, being a former lobbyist). The company was Enron.
Financial manipulation is real, encouraging trading of offsets without reduction of carbon. The basic problem is that unlike other kinds of contracts, where the two parties have an inherent interest in holding each other accountable, cap and trade lacks that basic link. The company that buys a credit is best served if it simply assumes that the seller is carrying through, the value lies in the credits and not in actually accomplishing the underlying goal. The seller has no incentive to notify the buyer if it turns out that the projected sequestration is not being realized.

Carbon is different than other kinds of pollutants for which cap and trade systems were successfully used to reduce emissions. Carbon dioxide is not only ubiquitous in the atmosphere from both natural and anthropogenic sources, it is a necessary component of the atmosphere for sustaining plant life. The very commonality of carbon dioxide makes monitoring for results impossible. In contrast, the financial and public relations motivation for manipulation of the process is high.
If the goal is to reduce carbon in the atmosphere, this is not a way to be successful. If the goal is to feel like we are doing something, with money flowing and paperwork growing, this fits the bill.