Interests and Influence in Climate Politics

This issue of The Economist does a better job of outlining the Cap & Trade scheme than I can:

Mr Obama’s preferred device for cutting emissions, a cap-and-trade scheme, is designed to do just that. It involves placing a limit on the volume of emissions that can be produced around the country each year, and then auctioning tradable permits to pollute. The intention is to encourage firms that find it cheap to cut emissions to do so, while allowing those with no easy means to pollute less to buy permits instead. Politicians and bureaucrats, meanwhile, do not need to identify where emissions cuts should be made; the market takes care of that for them.

So we’ve got a program whereby a “cap” places an effective limit on nationwide carbon emissions. Each ton of carbon is represented by a permit with a market value – currently projected to be around $15 – and either handed out or traded.  Sounds pretty simple right?

As with any other sought after, or in this case critical component of conducting business, a market emerges to facilitate distribution. Despite recent suspicions to the contrary, Obama has stated that 100% of carbon permits will be sold, not given out. Clearly, the assignment of “free” permits would amount to a lobbyist frenzy, politicizing the process and jeapordizing its’ credibility.

It sounds like the permit price will not be fixed once they are released, which confuses things beyond all recognition. For example, what if projections underestimate the difficulty of the “cleaning” process? The demand for permits would increase, presumibly equilibrating just below the actual cost to offset a ton of “dirty” energy with a ton of “clean” energy. So if the intitial price was, say, $15, the market bid the price up to perhaps $30, or $50, or $100.

On to the political aspect. Obama has expressed interest specifically renewables like wind and solar, and speaks quite negatively about sources like coal and oil. The favored technologies, as can be seen in the stimulus bill, will receive special treatment. Public funding in many forms; grants, subsidies, tax breaks, etc., bolster the growth of these areas. This may be all well and good, but it disturbs the carbon market. Difficulty would disproportionately fall on dirty states. And you know what happens when coal and corn get angry. The politics of energy interests, while perhaps well-intentioned at the onset, could lead to another sum-of-all-lobbies energy policy. That is precisely what we don’t need.

The Economist warns that the plan will likely drive up the costs of energy efficiency. Regardless of carbon-market prices, energy costs would undoubtedly rise for the consumer. Estimates predict the changes to be trivial – but not much with a price tag is trivial right now.

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