Sunday, July 18, 2010

Cap and Trade Summary & Review

I work with U.S. people in my day-to-day job and one thing common that I found out about them is they like to come out solution that appears to be a real solution but in fact is not. In short, if you just listen to what they talk without further analysis, what solution that they have proposed will seems to be really making sense.

However, with further thinking and detailed technical analysis of their solution, it will usually ended up that their solution is just another hoax. It all started with the burst and follow by sub-prime mortgage crisis. Perhaps now Cap and Trade could be one of them too - a possible brand new 3 trillion dollar market by 2050?

See the video clip below  from Annie Leonard who is also the author of "The Story of Stuff":

If you have difficulty to understand the video, you can also read my following summary and discussion on this "Cap and Trade" system. I hope that will be easier to understand.

What is the Cap? 

Global warming is due the emission of Carbon Dioxide (i.e. CO2) into our atmosphere.  In order to prevent and slow down the global warming crisis in the future, the cap is invented to tackle this problem. The intention is to limit how many CO2 that you can release to our atmosphere. The goal is to reduced the current CO2 emission by 80% by year 2050. So the dotted-line in the graph below is the "Cap".

Carbon permits or CO2 emission allowances was then invented in order to accomplish the goal to stay below the cap. It is like a license or permission to pollute the air. Government issues this carbon permits to companies who would like to pollute the air. As you can see from the graph, the number of permits will be reduced every year in order to meet the goal target in 2050.

[Discussion] I think this is definitely a right thing to do and it is always good to set goal that we all know where we're heading too. Good strategy in fact to so save our world! Don't you think so?

Devil One: Cap and Giveaway

The next question how are the Carbon permits are distributed? The government in fact is giving these permits for free based on the history of a company how much they polluted the air in the past. This is  called "Cap and Giveaway". What was suggested by Annie is instead of giving permits away to them, we could sell to them and use the money for better purpose (e.g. build a clean energy economy).

[Discussion]: I do not completely agree with it. Assuming if we sell the permits to those companies. Who will be going to bare the cost of their products? Consumers? So it ends up we pay more because of they're polluting the air? So indirectly, we're actually paying the government to allow those polluter to pollute the air? I don't think selling the permits will work too.

Devil Two: Offsetting

I think the most evil about this system is probably because we make this thing "trade-able". For companies which pollute less than the allowable permits, they can sell the remaining permits (i.e. offset permits) to those companies which want to pollute more than the allowable permits. This seems pretty reasonable as long as we don't go beyond the Gap as whole.

This is the part the system gets complicated and confused. Theoretically, it should work but that is another story in reality due to the complexity of measuring the amount of pollution. How to tell how much a company is polluting? If we can't measure it, how much permits we should give? What about the transaction costs involved in buying and selling permits? Consumer bares them? How about those company pollute less in U.S. and transfer their pollution to Asia since Asia doesn't participate in this Cap and Trade?

Devil Three: Distraction

The "Devi Three - Distraction" as mentioned by Annie is not really key message as compared to Devil 1 & 2 above in my opinion. What she was really want to say is the Cap & Trade protects business as usual and have no intention of saving our world. In short, it is a scam. :)

[Discussion]: As you can see, the really evil about this Cap & Trade to made this rule trade-able, something similar like stock market. It becomes so complex that no one is really know what is going on and forget about the original intention. U.S. once again create something out of nothing (i.e. predicted a brand new 3 trillion dollar market by 2050).

So, can we conclude Cap & Trade is a scam? I think no one can prove it right and of course no one can prove it wrong too. Similar to Sub-prime Mortgage, is that a scam? What do you think?

P/S: As usual (which I find it difficult to understand) for more details about Cap & Trade, you can visit the Wikipedia: Emissions Trading.


Alvin said...

i din know there's such a thing =_=" like this also can ah?

shengy said...

hi..nice post

LivingShed said...

i agree with shengy

Watadid said...

Thanks for the info.

GoodiesNBadies said...

Thanks..nice post

ChampDog said...

Yes, Alvin. I knew about his not long ago about Cap & Trade too. This is just some information sharing and discussion.

@Shengy, @LivingShed, @Watadid, @GoodiesNBadies, thanks! I hope you guys really find that useful.

Kris said...

yeah..the idea look kinda stupid but it will be a trillion dollar market..Imagine giving someone a licence to pollute the air, if you have the money..etc. And you earn money if you sell your carbon credit. Looks like a zero sum game to me.

And who is going to check which company is polluting the air.

ChampDog said...

It could be a brilliant idea depends how you look at it which is called business or perhaps politics?

Even if they want to check, I"m not sure how they're going to measure.

Tom C said...

The cap and trade system seems to satisfy the economic aspect of things, but might fall short on addressing the environmental issues - which, coincidentally, is the driving force behind cap and trade: To limit the impact of industry on the planet. As someone who deals in finance and Baltimore Estate Planning, I appreciate both the environmental and financial aspects of cap and trade, but there's definitely room for improvement.

ChampDog said...

Thanks for your comment, Tom. I'm wondering if satisfying the economy by creating something out of nothing is the right way to go?

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