Business/Finance

Carbon capitalism

American-style capitalism, sans regulation, has earned its present bad rap. Even so, some market mechanisms do work quite well. Commodities pricing is discovered and costs kept low because markets are very efficient at making sure that metals, oil, food, etc. are moved to where the demand is the highest from where the supply is greatest. Similarly, a market in traded sulfur emissions imposed by the Clean Air Act has enabled fossil fuel plants to reduce sulfur dioxide emissions (the main source of acid rain) dramatically since the market’s inception.

Markets don’t work for everything, however. The sulfur dioxide emissions market works because the effects are not hyper-localized – farmers in Kansas and Iowa won’t notice the difference between the emissions from coal plants in Denver, Boulder, or Fort Collins. However, in the case of mercury emissions from coal plants, an emissions market would be a very, very bad idea. Coal-produced mercury precipitates out of the air in a plume immediately downwind of the emissions source, and so there’s no way to fairly balance the increased emissions of one coal plant with the lower emissions of another. In this case, all the increased mercury emissions would to is poison more mothers and children.

But because markets work so well for so many things, the creation of a cap-and-trade market for carbon dioxide (CO2) makes a lot of sense. In a similar fashion to sulfur dioxide and unlike mercury emissions, CO2 emissions mix well with the atmosphere and so trading emission credits between one source and another is viable.

Add into the cap-and-trade equation so-called emissions banking (the ability to hold over CO2 emissions credits from one year to a later year when meeting the cap could be more expensive) and other price control schemes and you’ve got the makings of a complete market and financial system based exclusively around trading CO2 emissions credits. And that’s carbon capitalism.

But if cap-and-trade is really carbon capitalism, why do so many supposed capitalists hate the idea of a market in CO2? Simply put, it’s politics. Supposedly John Boehner is a free-marketeer, yet he’s calling carbon capitalism a “code for increasing taxes.” Paul Chagon of OneNewsNow quotes Dan Simmons of the Institute for Energy Research as saying that carbon capitalism would be “the largest tax increase of all time of all American history and probably all world history.” The conservative, pro-business National Center for Policy Analysis called carbon capitalism a “$646 billion cap-and-trade tax.” And a short piece on the pro-business, libertarian website American Thinker says “Paying more for energy as a result of federal policies is not considered a “tax” because after all, it’s not going to be called that. It will be named “Cap and Trade” – but the effect will be exactly the same.”

Even the Wall Street Journal, that very bastion of business and capitalism, has called carbon capitalism Obama’s “carbon tax policies,” “a cap-and-trade tax,” and “cap-and-tax.” You’d think that, if anyone would understand the fundamentally capitalistic nature of cap-and-trade, the Wall Street Journal would.

In other words, politicians and partisans aren’t above hypocrisy or the abandonment of their supposedly treasured ideals for political advantage.

Carbon capitalism is just that – capitalism. It will increase the price of energy somewhat, but that happens any time a market externality is priced. Making something a valuable commodity also increases the price of products made with that commodity, but you don’t see corn or oil commodities traders shouting that we shouldn’t trade corn and oil just because the price of tortillas and plastic sometimes rises. All of that trade is capitalism in action – putting money to work for the nation’s and the world’s best interests. The only difference is that this time the government is creating the market because business won’t step up to the plate and discover the price of something that’s currently free.

The same thing happened with sulfur dioxide, and the utilities claimed then that the sulfur emissions cap-and-trade system would put them out of business. It didn’t. The utilities predicted skyrocketing energy prices. That didn’t happen either. What did happen is our air and rivers and lakes got a lot cleaner as a result. And now the American Coalition for Clean Coal Electricity touts the results of that government-required market as a reason that “coal is clean”:

Even as the use of coal for generating electricity has nearly tripled over the past 30 years, emissions from coal-based power plants have been dramatically reduced through the use of advanced technologies. Today’s coal-based electricity generating fleet is 70% cleaner than it was in 1970 (based upon emissions per unit of energy produced).

That’s the power of the cap-and-trade market for sulfur dioxide emission credits – it’s been so successful that even the coal industry front groups want to claim it as their own.

And just as the utilities and naysayers were wrong about the costs of the sulfur dioxide market, they’ll be wrong about the costs of the carbon market too.

It’s not a tax, it’s not even cap-and-trade – it’s carbon capitalism.

7 replies »

  1. Brian, A market in CO2 won’t necessarily increase prices….that is a myth perpetrated by anti-capitalists. Personally, I think it would be a good thing and if there was sufficient liquidity in the market, I would not hesitate trading CO2. The present schemes don’t work as expressed by their trading volume, contract specifications, and delivery mechanisms(or lack of).

    Yesterday, I wrote a tongue and cheek article over on my blog regarding the carbon footprint. I was surprised at the negative reaction, especially since much of my readership is conservative, trader types. Although I detest censorship, I had to delete a slew of comments with a heavy hand. The environment stirs up as many passions as politics, and some just can’t realize a joke when it stares them in the face.

    http://masteroftheuniverse.wordpress.com/2009/03/31/my-big-carbon-footprint/

    You decide if this was an obvious joke or not.

    Jeff

    • I’d say it was a reasonably clear joke, although not necessarily an obvious one. I wasn’t sure of that until about halfway through, but from that point on it was pretty clear to me. And if some of your readers have no sense of humor, then I can see how they’d not get the joke.

      Life is far, far too short to go through it without a sense of humor.

  2. I’ve read this 3 times, and don’t understand. I sincerely am not being a troll or snarky, I’m genuinely looking for clarification. I’m not clear on the analogy with other commodities; people buy corn and oil, but when purchasing energy, they’re not ‘buying carbon’. While it’s a byproduct for many energy generation methods, whether CO2 is produced or not is completely secondary to the transaction.

    The author says repeatedly that cap-and-trade (a phrase even supporters of the strategy use) is carbon capitalism, but doesn’t ever seem to explain why or what the definition of this newly coined term is. How is government regulation and artificially inflating the price of energy generation based on the amount of a byproduct ‘creating a market’ rather than just increasing cost and price of a product in an existing market. I don’t disagree that calling it a ‘tax’ is probably incorrect terminology (in that it seems that the money goes to some presumably private carbon credit industry or something), but it seems like calling it a new market and ‘carbon capitalism’ is equally disingenuous.

    • The commodity created is carbon emission allowances. In order to produce energy, carbon must be emitted, and therefore once the market is created, energy producers must purchase emission allowances. Obviously that’s not the case today, as I pointed out – government intervention is required to attach a value to an “externality” (or “byproduct,” if you prefer) that is not presently priced. Carbon dioxide emitters are unable or, more likely, unwilling to price their carbon emissions voluntarily – No smart businessman will ever voluntarily increase the costs to his business without a means to offset the loss of income.

      Mirriam-Webster defines “capitalism” as “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.” In the case of carbon capitalism, carbon emission allowances are redefined from “byproduct” to “capital good,” and once that happens, capitalism takes over. Investments in those allowances are determined by private decision about how many to buy, whether to speculate, whether to bank them (if banking allowances is ultimately allowed) for use/resale at a later date when cutting carbon emissions is more expensive, and so on. Distribution of the allowances is determined by who can compete to afford the allowances, and those energy companies who don’t have to buy as many allowances will have a competitive advantage over those companies who have to purchase a large number of allowances.

      You’re also coming at this from the perspective that some things are external to the functioning of a healthy market, when that’s been proven inaccurate in recent years/decades. Every “byproduct” has to be disposed of somewhere, and so the cost of disposal has to be included in the market. This is true of toxic wastes, coal combustion byproducts like fly ash, chemical solvents, water well protection from oil and gas drilling wastes, and so on. After the discovery that sulfur dioxide emissions from coal power plants was causing acid rain, a “byproduct” that had been free had to be priced to accurately represent its effect on the health of the people and industries affected by acid rain – fisheries, tourism, etc. We now know that carbon dioxide is a potentially harmful byproduct of energy generation, and so it’s time to internalize this externality.

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