Carbon Cap and Trade: How Wall Street Will Game the Regs and Trash the Planet

Guest post by Heather Williams and Paul Baker:

For aficionados of offbeat road races, there are few events that top the Tour de Donut, a 30-mile bicycle race held every July in tiny Staunton, Illinois. In this belly-busting race, competitors stop twice during the course at break stations where they are offered glazed donuts. For every donut that competitors consume, five minutes are deducted from their scores. Thus, for even mediocre riders who also are really good donut eaters, the ride offers an offset structure that makes them champions. In recent years, with top competitors downing over 20 donuts each, winners have actually posted negative times, finishing their races—on the books at least– before they began.

Offsets, when measured not in donuts but in carbon equivalents, have about as much correspondence to real-time facts. Unfortunately, current climate change legislation being drafted in Washington, DC today is anchored in a scheme nearly as absurd as that offered by the glazed treat-loving architects of the Tour de Donut. But given that such legislation is supposed to safeguard the planet against an overwhelming environmental threat, there is some question about whether carbon cap-and-trade is the road we really want to take.

Meet Lieberman-Warner, the Sequel

On March 31st, House Energy and Commerce Committee Chairman Henry Waxman (D-CA) and Representative Ed Markey (D-Massachusetts) released a draft bill that nobly called for a steep 20 percent decrease in greenhouse gas emissions by 2020. The bill is touted as taking bold steps to address rising carbon dioxide levels in the atmosphere. The fine print, however, is what will cement the marriage of the U.S. economy to coal power, big agribusiness, and Wall Street investment banks.

looking-over-wall-streete-_-gogglaThe bill will do this in three ways: first, by delaying CO2 reductions for up to a decade and a half through offsets, or contracts that are supposed to pay a third party to reduce carbon output on behalf of the polluter but rarely do so in practice; second, by subsidizing research and development on carbon capture and storage technologies that few experts believe are viable. Third, and perhaps most important, the Waxman-Markey bill and its counterpart in the Senate are likely to put in motion a climate derivatives market so big and so risky that the world may end up being forced to choose between propping up investment banks that have crawled back to life trading financial instruments based in fictional emissions reductions, or in actually regulating industry, agribusiness, and mining and physically restricting the flow of greenhouse gases to the atmosphere.

The rise of a cap-and-trade system for the U.S. economy, disastrously, intersects with an implosion of global financial markets. This not only means that government revenues are stretched, but also that  refugee capital suddenly unable to find profit margins in sub-prime mortgage securities or credit default swaps is seeking to securitize the trading of six billion tons of U.S. greenhouse gases in globalized climate markets. If the worst of Wall Street has its way, the bill will achieve little in terms of real reductions in carbon emissions, but will create a system of greenhouse gas-backed forward contracts, futures, swaps, and options that will probably start at a volume of $40 billion a year or more and will grow over time.

As a group of leading analysts advising Congress on cap and trade at the Duke University Nicholas Institute put it, “A low volume of allowances in the marketplace and/or significant concerns about allowance price volatility in future years may cause the majority of allowance-based instruments to trade as derivatives (including forward contracts) rather than allowances.” (emphasis ours).  What is particularly notable about this report and many others like it is no one in the financial world seems to be questioning whether there should be a derivatives market in climate-backed instruments, but simply what the details of the trading rules should be.

Is another Wall Street casino and giveaway to big industry what we want from climate change legislation? We believe that anthropogenic climate change is indeed a threat, and therefore, the government’s carbon reductions system must be transparent, independent of special interests, and able to send clear price signals to Americans about the relative carbon intensity of the things they buy. For these reasons, we urge Congress write a bill that works straightforwardly to address the forces that threaten our well-being and that of future generations.

Heather Williams is Associate Professor of Politics at Pomona College and can be reached at [email protected]; Paul Baker is Professor of Earth and Ocean Sciences at Duke University and can be reached at [email protected] This post is a shorter version of an article in the April 15, 2009 edition of CounterPunch.

Photo: Flickr / Goggla.



  1.'BenDoubleCrossed says

    The Concept of CO2 Cap and Trade is Absurd

    The real reason Cap & Trade is being foisted on the world is it creates a 3 trillion dollar commodity market for you guessed it: hot air. Finally politicians have found a way to put a price on their most abundant resource! And for politicians there is no downside as nothing has to be actually produced. The real beneficiaries are the rich special interest who will get wealthier setting up and trading in this new commodities market.

    The cost will be past to citizens who will pay more taxes to operate new regulatory bureaucracies and more for goods as business passes the cost along to them.

    All this based on the premise that operating automobiles is resulting in global warming. Question: did Fred Flintstones truck fleet cause the last period of global warming or is global warming a cyclical event that is more affected by sun spot cycles. The Earth has had multiple tropical and glacial ages over the millennia. The most recent news is that the oceans of the world will be cooling for the next 25-30 years.

    Furthermore, it is my understanding that the most prevalent hot house gas is water vapor. Should citizens of earth try to stop the rain cycle?

    And if we are going to implement Cap and Trade who will decide what the optimal CO2 carrying capacity of Earth is?

    And there are questions about how to implement financial controls and reliably audit such a system. Will every person and business on the planet be issued C02 permits? Is the permit an asset a business can liquidate when it goes out of business? If a business in California goes out of business and sells its CO2 permit to a company in England, will a new company in California have to find another seller to open his business and replace lost jobs? After all, if there is an optimal CO2 carrying capacity then an increasing population of people and businesses means a lower standard of living and reduced CO2 allotment for each new person or business.

    Upon their death can Mom and Dad leave their CO2 permits to their children? Should Mom and Dad be limited to having two children?

    What about the countries that do not subscribe to Cap & Trade. Will multi-national companies export new construction and jobs to 3rd world non-subscribing countries? And the flipside, will the people of the Amazon miss out on new opportunities because an American company bought 1000s of acres to be left unused to acquire carbon sequestration credits.

  2.'David Ocampo G says

    In the April 19 NEW YORK TIMES MAGAZINE there is an “interview” with Steven Chu
    in which he states, “Well, we’re not talking about a carbon tax. President Obama and I are not talking about a carbon tax.” Not long ago he said the Carbon Tax is the way to go.

    The CTC says the Carbon Tax is the way to go. So do Mankiw and a host of others. (Me too.) “The science is settled” except for a few outliers. “The economics is settled” except for a few outliers. But obviously, “The politics is NOT settled” — the outliers are on the high ground and us grunts are trudging along in the swamp. What’s to be done?


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Last modified: April 17, 2009