Saturday, April 4, 2009

Post No. 101: What is "Cap and Trade" and Why are So Many Saying All of those Things about It?

We recently asked our readers to submit possible topics for discussion, and we received numerous responses. We've posted three of them thus far. Here is the fourth:

"I would like to read what the people who visit your blog have to say about cap and trade."

We indicated to the reader that although we had heard the term used, we were not very familiar with the details of the issue, other than the fact that people seem to be arguing about it. Consequently, we went to Wikipedia, and looked up the term. We were re-directed to "emissions trading," and an excerpt of the article appears below:

"Emissions trading (or emission trading) is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. It is sometimes called cap and trade.

"A central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emission allowance must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was needed. Thus, in theory, those that can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society.

"There are active trading programs in several pollutants. For greenhouse gases the largest is the European Union Emission Trading Scheme. In the United States there is a national market to reduce acid rain and several regional markets in nitrogen oxides Markets for other pollutants tend to be smaller and more localized.

"According to some, cap and trade "is inefficient and prone to market failure", and only a carbon tax 'allows you to make an international agreement globally effective in a short period of time.' However, a cap and trade system can be politically preferable for existing industries because the initial allocation of allowances is often allocated with a grandfathering provision where rights are issued in proportion to historical emissions. Most of the money from trading is spent on environmental activities, and the investment directed at sustainable projects that earn credits in the developing world which contribute to the Millennium Development Goals. Critics of emissions trading also point to problems of complexity, cost, monitoring, enforcement, and sometimes dispute the initial allocation methods and cap."

To see the entire article, simply click here.
So what's your position on all of this?


  1. If all were going well with the global ecomony at this time, cap and trade might look more desirable to me. But, as it is, our political class has enough immediately urgent and complex matters to attend to without adding another sure-to-be highly contentious ingredient to the mix. I say, therefore, that we should hold off on cap and trade for now, while continuing all efforts to limit carbon emissions; while sharing technology on to do so; and while applying whatever leverage can be applied to trading partners to urge them to do the same.

  2. I may actually be in partial agreement with rodak on this though my reasons may not coincide. I have two issues with Cap and Trade:

    1. I believe the less government meddles in business, the better (though I think government does have a role as "watchdog".)

    2. The Cap and Trade schemes seem to be creating an industry of its own. This is eerily similar to the Enron phenomenon and poses a similar opportunity for abuse and corruption. When we start trading in "potentials", it is difficult to control. See what recently happened with "derivatives", the Real Estate "bubble", speculation about oil, and so on. There are always these unintended, or unforeseen, consequences of excessive tinkering with market forces which come back to cause us misery. The most immediate consequence that can be seen is a rapid increase in operating costs and the cost of energy. Rapid increases in these two areas have a huge detrimental effect on the overall economy and impact the economically weakest part of the population first and most.

  3. Is it just a coincidence that Obama and some of his friends set up a trading exchange for these energy credits in Chicago a few years back? As with any exchange there is a bid and ask spread on the actual trade. This goes to the operator of the exchange. (Can you say profit?)

    Also, this is nothing but another tax to force companies to change their energy production method adding a cost of about $3,100 per year per family in the US. Europe has had cap and trade high gas taxes and so on to encourage environmental compliance. (It sure has worked well for them.) To the point that many are trying to unwind these schemes as we speak.

    Now If the goal is really to develop clean energy, then there should be much more discussion of Nuclear power with recycling plants as in France, Extension of Powergrids, using technology to improve line loss percentages and allow the grids to extend to areas where solar energy and wind can be harvested and delivered to where it is needed.

    No my friends this is about government control and money. So sad.

  4. Now If the goal is really to develop clean energy, then there should be much more discussion of Nuclear power... [etc.]

    Uh...Obama has been talking about all of that incessantly*. Meanwhile, however, the old, fossile-fuel-burning facilities are still online, and proposals concerning how to deal with those during the years of conversion do not seem to me to be out of line.
    *Although because of the NIMBY syndrome, you can forget about nuclear in the U.S. of A.

  5. His Environmental friends (major supporters of his campaign) block all new nuclear facilities, extensions of the powergrid to desert areas and the NIMBY for them is the whole planet!!

    I didn't even mention Natural Gas. But oh my we might have to allow more drilling for that and since it usually comes with oil, can't do that.

  6. Coop mentioned nuclear power. Earlier today, there was a book discussion which aired on C-Span2 Book TV regarding uranium and its various uses, and the countries which have found ways to use it. The same program will air at midnight tonight, and at 7:30 pm EDST on Sunday.

  7. Coop: Why have so many in the United States been opposed to nuclear energy for so long, and if any of their concerns were legitimate, have they been addressed in recent years?

  8. Not sure, Log. My guess is between Environmentalis, NIMBY that Rodak mentioned, Three Mile Island (read safety issues) and fear of terrorist attack on one of these facilities. I think all of these are manageable so the discussion should not stop. It is a matter of bringing the public up to spead on the latest technology regarding these plants.

    I still hear the argument that there is too much nuclear waste. This indicates the speaker is not aware of the new technology around recycling of nuclear material back to fuel. So education is in order.

  9. Coop: We think that you have pretty much hit on the most significant concerns raised by those opposed to nuclear energy (along with Chernobyl.)

    There is one additional factor which we believe to be of primary significance, about which few speak: the inability of the average citizen's brain to wrap around and comprehend the concept of "radiation." It is something which people feel that they can not see or hear. They perceive it as illusive and frequently undetectable. If the energy were something to which people could relate much easier, and actually grasp conceptually and physically, then you might have fewer detractors. However, nuclear is roughly equivalent to "mysterious" in the mind of the average citizen.

  10. Probably right. People don't connect the dots. Solar energy is the conversion of solar "radiation" into electricity. They don't think of that as similar to what happens in a nuclear power plant, even though it is. It is just that the sun's radiation is filtered by our atmosphere and magnetic belt.

  11. Coop: We believe that there is a substantial difference in perception between solar energy and nuclear energy. When you visually think of "solar," it involves relatively thin reflective panels atop poles or even houses. When you visually think of "nuclear," you think of a huge dome, isolated from the public, with gates with barbed wire, guards at the entrance, and lots of red warning signs. The instinctive response of people to "nuclear" is one of fear.

  12. There is also the fact that if the source of the sun's radiation decides to explode it its 93 +/- million miles away. :) And it is not vulnerable to terrorist attack and has no dangerous residue (spent fuel rods).

    I am one of those who is so against nuclear, tho would certainly prefer that to filthy fossil fuels. There are however so many viable alternatives as sources of energy from burning trash to collecting methane gas from cows to solar panels. The lists goes on and on and all are in the long run better and cheaper than fossil fuels or nuclear. Germany now gets almost 30% of its power from alternatives. Cities burning their own waste is a popular win-win alternative in Europe. So are solar panel on roofs so buildings and homes become their own power station.

    The cap and trade concept came out of the Kyoto Accords. It was originally conceived as a trade between countries where the more advanced and therefore polluting countries would buy credits from less developed countries. As part of the payment the advanced countries would help developing countries to construct alternative sources of energy. In effect the developing countries would remain non-polluting while serving as alternative fuel research areas and getting the power they need to advance. It was then thought that when the best source of energy was found and proven the advanced countries could slowly replace their fossil fuel plants. It was a good idea for the countries, but never got off the ground.

    Cap and trade for the nation is as stated above just too open to abuse of one kind or another. It also if established would take away from the search and development of alternatives as there is no real incentive to change.

    Increasing the cost of oil (gasoline) is the only sure way to curb and change the insatiable need we Americans seem to have for energy. I was so happy to see $4 a gallon gas and sorry when it went back down and the call for an alternative fuel went out of style. But if you will notice the price of gasoline is going back up. OPEC will continue to play this little yoyo game with us as long as our attention span is so short!

    So much is being made of the electric car. Where do people think the electric comes from? The electric car will only make sense when electricity is gotten from some alternative to fossil fuels. The hydrogen car is in my mind the ticket. this is truly and unending renewable source of energy and what could be cleaner than water. BB

  13. Welcome Brenda.

    A significant segment of our readership contends that government does very little well, and that it should stay out of the lives of its citizens, particularly in the business realm.

    Why hasn't the private sector, operating on free market capitalism principles, fully addressed our energy supply and independence issues? Assuming that government stays out of the picture, and does not play a role, what can we expect from the private sector, and when?

    If we leave it entirely up to the private sector to voluntarily address pollution concerns as it deems necessary, can we trust them to ensure that pollution will not reach dangerous levels?

    If the Chinese government were not involved in the business activities of companies in its country, would we have more or less pollution being emitted by Chinese companies?

  14. A few weeks ago, I posted a little pole on my blog regarding nuclear power plants. I would have liked more participation, a lot more, and I would like to see a scientific, well thought out, poll on the public's knowledge of these power plants. In general, from random conversations mostly, it has been my observation that nuke plants are misunderstood technology. The nuclear reactor is nothing more than a heat source to create steam to run turbines which, in turn run generators (mostly these are combined units) which create the electricity. My only problem with nuke plants has to do with how they are maintained and operated. there are also issues with the containment (it turns out that the cement breaks down earlier than was expected. This was noted at the San Onofre plants and other places. While Navy reactors have an excellent safety record, there is a different mindset involved. There is a strongly enforced discipline coupled with the fact that these sailors live alongside the plant, very close alongside. Civilian plants have neither the tradition of discipline nor do the workers live within feet of the reactor. This concerns me a bit.

    Your questions regarding pollution would be best addressed by looking at authoritarian run countries such as Russia (in its Soviet days) and China. Pollution is not addressed effectively where the public is not allowed a voice. In the US, public sentiment is roused and government responds. I don't think we can trust private enterprise to deal with the issues without that public pressure backed by government enforcement.

    I think the last question about China is unanswerable.

  15. Douglas: Are you serious in suggesting that the American public can not trust private enterprise on such issues without public pressure backed by government enforcement? Why can't we trust private enterprise? Aren't they more honorable and trustworthy than elected officials? Arguably, at least it is their money which motivates their conduct, and not the money of other interests.

    We suspect that if you took a poll of American citizens right now, business people would rank higher in trustworthiness than politicians, so why not let businesses do whatever they want, and let the citizens beware or "caveat emptor?"

    If the citizens are so sharp and sophisticated to be able to criticize others (and to vote), then they should theoretically be sharp enough to protect themselves and their assets. As we often hear the politicians say, the American public is smart, is it not?

  16. We apologize for having put forth a theoretical position or opinion, with which some of you disagree. That was imprudent on our part. We are not nearly as sophisticated, informed, or well read as you. We'll try to avoid such indiscretions in the future.

  17. Brenda--
    You made some excellent, objective, points. I hope that you will continue to contribute to the discussion here.

  18. Log, I think I am saying that we always need checks and balances, the power can be abused easily enough, and right doesn't always win. I am not sure why you are arguing that one or the other should have all the power. The tone of your words suggest sarcasm. If there's no sarcasm intended then the words suggest a kind of "law of the jungle" applied to a community. Neither way sounds very appealing to me.

    People form governments (when one is not imposed on them) to protect them from abuse by others, both outside and inside the community. I see no problem with that but just as we want protection from private interests with power so, too, do we want protection from public interests with too much power.

    A democratic society says the people have the final word. In those societies, the government is the way that word is presented and backed up.

    I don't want to get into a history lesson on monopolies and trusts nor do I wish to subject you or anyone else to a civics lesson. Even though it seems that these are needed from time to time.

  19. Nothing we express is personal Douglas. "We don't do individuals." Our questions are presented for purely dialectic purposes. It's a clinical exploration.

    By framing issues in terms of isolated overriding principles, or combinations of factors, we try find where people stand on the continuum or range of positions. This is not about us; this is about exploring the thought process.

    Everyone is entitled to their opinion and to express it. Anyone can take his or her mind anywhere they wish to go. This is not about rigidity in approaching any concept. We bounce around on positions purposely.

  20. Log, I believe you. I also think that has nothing to do with the comment you posted nor with what I said in response. You asked questions that presented a side, a position. I tried to understand the nature of those comments and I presented my reaction to that understanding.

    As you say, everyone is entitled to his opinion.

  21. “Why hasn't the private sector, operating on free market capitalism principles, fully addressed our energy supply and independence issues? Assuming that government stays out of the picture, and does not play a role, what can we expect from the private sector, and when?”

    Say What?? Government has been a significant player in the energy market ever since FDR took over private power companies back in the 30’s. So much so that saying it is a “free market” is a real stretch. Think about it for a second. If you become dissatisfied with the service or price of Duke power electricity, to what competing company do you turn? None. You have to start producing your own energy – maybe by purchasing solar panels and using grid electricity when the sun is behind clouds for a week. But the cost of solar panels is so out of reach it doesn’t make financial sense. Free market participants vote with their own money.

    This whole Cap and Trade thing makes absolutely no sense at the company level. Here is an example. The power company has this plant that is producing electricity for a significant area. Problem is, it is one of the older coal fired plants. The company has invested in smokestack scrubbers and other technology to try to minimize the carbon effect. Now comes the government and they set new standards that the company has to meet or will pay a significant tax. What are the company’s options?

    1. Build a new plant with cleaner technology.
    2. Do nothing and pay the tax and pass the cost on to the customers.
    3. Re-fit the plant to meet new standards.

    Choice one may take 20 years due to environmental, government regulations and legal processes. Causing the company to incur the tax in the interim and have to pass it on (also choice 2) for the intervening period.

    Choice three is also very expensive and will take time to correct the plant, if it is even possible. This also causes the company to employ choice 2 for the intervening period.

    So, if you look at these alternatives and evaluate the options considering you will be using your own resources and those of your stockholders, you will more than likely just settle on choice 2.

    The effect is no change in carbon output, higher energy cost and those that run the cap and trade exchange make money.

    For companies outside of the monopolies, let's say manufacturers where competition is a factor, this creates an environment where newer entrants will have an advantage as they will receive the carbon credits and be able to sell at lower prices. This will create a significant incentive for new companies to form and replace the older companies. But, it will cause the older companies simply to relocate to more competitive environments to stay competitive and because of their brands keep new entrants to a minimum.

    Whoops, that is what has been happening over the last 15 years because of labor cost and taxation. Let’s add cap and trade to insure that more jobs are lost to other countries.

  22. Coop: We were raising the issue from a dialectic perspective. Are you suggesting that had there been no governmental regulations and restrictions on the private energy industry during the past century, that our nation's energy needs would have been met, with some "appropriate" attention paid to pollution issues, and that we would not be having this conversation today?

  23. Although some of our original articles clearly constitute opinion or commentary, we generally try our best to avoid "presenting" or "advocating" a side or position when we pose questions. We simply try to "state" different positions which various factions, all across the spectrum, support and then wait for the responses.

    We bounce around all over the place in doing so.

    We frequently, but not always, state positions in the either / or fashion, since it flushes out the "slippery slope" theorists, who typically argue that even slight adjustments or movements in any direction should not be made, out of fear that such an incremental movement will lead to a full blown slide in an unwanted direction, to an extreme.

    When one employs the slippery slope argument, then one effectively draws a line in the sand, and is highly unlikely to make ANY adjustments to address a problem. Not much in the way of resolution is achieved under those circumstances.

    We pose questions in many different ways, on purpose, to carry the thought process in at least 27 different directions. We would prefer that people think beyond 2 or 3 paradigms. Of course, we only suggest alternatives; we can't force anyone to go in any direction conceptually.

  24. I'm just saying that before FDR took over, private energy companies were competing for customers and would have to listen to them. Perhaps if customers demand change and can move to competitors who listen, maybe we would be having a different sort of conversation. Don't know if they would be better than what we have now, but I do know competition allows change to become happen.

    Also, the best use of government is to provide services to those whom private companies (generally because of cost/profit) ignor. In the case of energy, the government's program to extend electric service to rural areas is a good example. But when government tries to centrally manage a market or industry - bad things happen.

  25. Coop wrote: "Also, the best use of government is to provide services to those whom private companies (generally because of cost/profit) ignore."

    Coop, this is a beautiful articulation of a reason for the involvement of government in a measured fashion. (We assume that you are referring to something like the TVA.) Thanks for that contribution. We'll pose questions exploring this theory with some frequency.

  26. At 10:00 pm EDST this evening, the History Channel will air a special presentation entitled, "Ripped Off: Madoff and the Scamming of America."

  27. Coop: We'll tell you something else which we appreciate: your acknowledgment that you are unsure whether we would be any better off today had there been no government involvement or interference with private energy companies during the last century.

    So many commentators, on and outside of our blog, seem to suggest that they are "all knowing" and have some special crystal ball enabling them to summarily dismiss the views of others, and characterize their views as "truth."

    All sides have to acknowledge the uncertainty of taking certain actions for us to be able to work in a collaborative fashion. It also makes those participating in the discussion more receptive to the views of others.

  28. Here is a recent article that shows what this agenda really is all about:,2933,510937,00.html

  29. Brenda--
    You made some excellent, objective, points. I hope that you will continue to contribute to the discussion here.

  30. Coop: Why have so many in the United States been opposed to nuclear energy for so long, and if any of their concerns were legitimate, have they been addressed in recent years?


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