Cap & Trade: A Boondoggle at any Price

September 7th, 2010
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My “Open Range” column from the September 2010 edition of Alberta Venture magazine:

Bound to fail, guaranteed to waste money

Of the ways suggested for Canada to cut greenhouse gas emissions, the most seductive is “cap and trade”. It’s hailed as being both effective at cutting emissions and economically efficient, minimizing costs while maximizing benefits. It’s conceptually simple: factories, facilities and so on get an emissions quota or allowance, then earn tradable credits by coming in under their ceiling or buy credits on a carbon market in order to emit beyond their limit. It incentivizes continuing emissions cuts. Its market mechanisms keep the faith with core economic principles such as supply, demand and price discovery. And it promises relatively light government involvement once underway. No wonder it’s popular. Its Canadian adherents range from environmental groups to industrial unions, blue-chip business organizations, some mega-corporations, several provinces and, for a time, the federal government.

Don’t believe it. Carbon markets are vulnerable to being distorted and debauched for illegitimate profit. “Gaming” the carbon system starts right at the beginning, with frenzied political lobbying over emission quotas. The split determines who will have surplus emissions credits to sell and who must buy (or shut down facilities). From there spirals round after round of complex and opaque favouritism. One recent paper cited 10 methods to undermine, corrupt, circumvent or divert carbon markets. They included raising prices after receiving free permits, exaggerating the impact of carbon offsets, inventing offset projects in far-off locales, brokering phantom carbon trades, defrauding emitters of their carbon permits, recycling expired carbon credits, manipulating credit and offset pricing – and most richly ironic, scamming profit-hungry investors in the system’s many associated companies.

The mini-paper was by Michelle Chan of – wait for it – Friends of the Earth. When an ardent environmentalist does a Letterman-like list of loopholes, we should take note. Why the vulnerability of carbon markets? Mainly because the “trade” part of cap n’ trade isn’t a real market, but a parody of one. Real markets arise spontaneously, set prices freely and involve the open exchange of desirable goods and services between willing buyers and sellers. The carbon market turns every principle on its head. It’s artificial, coercive and centres on preventing creation of a byproduct that normally has neither cost nor value. It’s based on concocted scarcity.

Cap n’ trade would drive up the cost not only of energy but of producing nearly any good or service, which would be largely passed on to consumers. That makes it little different from a tax increase – hence the derisive moniker “cap ’n tax”. But the “tax” windfall would largely go to the very parties gaming the system. Sadly, cap n’ trade ends up as Byzantine in practice, as corrupted and compromised in application, as it is simple in concept. Distinguished economist Robert Samuelson puts it in the long government tradition of “proclaiming lofty goals that are impossible to achieve”.

Alberta’s economic lifeblood – supplying energy to North America – results in large CO2 emissions that amount to innocuous plant food but of course have gotten us labelled the “worst offender” and “biggest polluter”. The provincial government has spent the last 20 years attempting to stifle, blunt, head-off or appease environmental groups and federal departments eager to wield the blunt force of coerced, economy-crippling emissions reductions – particularly cap n’ trade and the dreaded carbon tax. We’ve achieved the bizarre trick of creating both the things we’re trying to avoid most, in the Climate Change and Emissions Management Corp., which collects a $15-per-tonne penalty from Alberta’s large emitters that fail to reduce their emissions or purchase offsets or credits. Cap, trade and tax – all in one.

Among the other detritus of this desperate campaign is a vast web of regulations, organizations, research initiatives and direct, de facto and/or hidden subsidies for green technologies, alternative energy and industry-driven abatement schemes like CO2 sequestration in association with enhanced oil recovery. These are expected to spend some $6 billion over the coming five years on technologies and processes (and overheads) related to driving down CO2 emissions. Advocates tout the resulting boost to GDP and thousands of “person-years” of employment without regard to the opportunity cost, the diversion of funds and human capital from truly productive uses. Such schemes, indeed, have become fiascos on a grand scale in Denmark and Spain – for every new job “created” destroying two to three others by diverting consumer spending towards artificially higher energy costs.

It’s a hydra-headed beast. After abandoning cap n’ trade, the federal government is launching into industrial destruction through edict. In late June environment minister Jim Prentice ordered the shut-down of 33 coal-fired electricity plants when they reach the end of their accounting (rather than physically useful) lives, unless those plants can match the emissions of natural gas-fired power. One report claimed any further life-extension would even require mandatory CO2 capture and sequestration – ruinously expensive, barring major subsidy. Prentice’s words were ominous: “Our regulation will be very clear…When each coal-burning unit reaches the end of its economic life, it will have to meet the new standards or close down. No trading, no offsets, no credits.” Alberta and Saskatchewan, which get the bulk of their power from coal, will be hit hardest. It’s hard to see how this is constitutional.

The ever-changing melange of greenhouse gas policies, regulations, subsidies and decrees risks creating the worst of all worlds. We’ll have a provincial cap n’ tax scheme funding a giant grant-disbursing outfit run by a retired technocrat. We’ll have vast and costly taxpayer- and industry-funded “abatement” and “research” programs wasting billions. And we’ll have dictatorial government fiat. It adds up to ruinous costs, perennial failure – and no effect whatsoever on global climate, as developing countries add more new coal-fired plants each year than Canada’s entire fleet.

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By George Koch
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