Cap & Trade

[audtatious]

Looks like I've stirred up some interesting conversation here the last couple days

So, I'm leaving for Maine to take a weeks vacation and thought I would lay this out for discussion so I have something to read when I come back (like that will be difficult). I believe the Senate votes on this today.

Those who are Mother Earther's will support any initiative to lower the deadly poison called CO2. Regardless of your viewpoint on Global Warming, CO2, etc., what about this particular bill? The lead out is to put measures in to lower pollutions like CO2 which cause climate change. This will force companies to purchase credits in order to spew these toxic entities into the atmosphere as a way to force said businesses into other practices to lower emissions. It is also slated to add "green jobs" to replace any job that may be lost due to this initiative. At least that is my take on it.

Now, those against C&T say it will put great stress on the economy, raise gas prices itself by .58/gal which will raise the cost of all "stock/supply/food" items as well, raise energy bills across the board, will only supply 1 job for every 3 lost and eventually penalize all consumers and households in the US.

Again, what about the bill? Seems there are some extras within the bill that, based on some viewpoints, may be inappropriate or absolute BS. Here's what I have seen discussed:

1) On page 1193, the bill would add a section to the Social Security Act on an "Energy Refund Program." Basically, those making no more than 150% of the poverty line, would get monthly cash payments from the government to offset the extra costs that are caused by this bill. In other words, as your energy bill goes up, the feds will help offset that increase. That would mean single individuals making about $17,000 a year and families of four with $33,000 in income would be eligible for energy payments.

2) Page 1209 the Earned Income Tax Credit will be changed by doubling the EITC for those with no dependents, and include an inflation adjustment. So, in essense, a doubling of the EITC for low income workers with no dependents who qualify for aid.

3) Before the House vote on the bill, Rep. Henry Waxman (D-Calif.) inserted a last-minute 310-page amendment into the cap-and-trade climate change bill just hours before the bill reached a House vote last Friday evening, and the amendments included indecipherable provisions for something called a “central procurement state.”

4) “Title IV, Subtitle B, Part 2, Section 426, of the American Clean Energy and Security Act of 2009 states: ‘An eligible worker (specifically, workers who lose their jobs as a result of this measure) may receive a climate change adjustment allowance under this subsection for a period of not longer than 156 weeks…80 percent of the monthly premium of any health insurance coverage…up to a maximum payment of $1,500 in relocation allowance…and job search expenses not exceed[ing] $1,500.’”

There is more coming out about the bill as people have a chance to go through it all and the above is simply things I found on a quick search.

Thoughts?

[themadscientist]

Ask Obama...

http://www.youtube.com/watch?v=HlTxGHn4sH4

[smockers83]

http://online.wsj.com/article/....html

There was a really good article I read in some science journal about cap-and-trade vs. carbon tax. If I ever find it again, I'll post it.

[audtatious]

This thread is a disappointment as I expected more upon my return.

FAIL

[bobotech]

Nah, not a huge fail of a thread.

Just that every intelligent person out here realizes that Cap and Trade is one of the worst economic decisions of our time.

It is purely a "feel good" program that has zero monetary gains. Just like cash for clunkers.

It is another huge tax just for doing business as usual.

[audtatious]

But......C&T will help lower pollutions which cause Global Warming so to some it is absolutely critical. How do you monetize Mother Earth?

[smockers83]

How do you monetize Mother Earth?

The same way the government monetizes radio frequencies.

But but but....guess what I found...

http://www.scientificamerican....s-wor

That article I've been looking for. It's kind of lengthy but it's a good read for someone who wants to be interested in how something like this works.

[audtatious]

Where there's a will, there's a way. Gore seems to be doing quite well with his accumulated wealth based upon MMGW and others are desperately trying to follow his lead.

[smockers83]

Another thing I found (how I found my article). Here's a paper I wrote on cap-and-trade vs carbon taxes, a pretty rough one I might add.

The Cap-and-Trade System

The first proposal that will be looked at is a general cap-and-trade system. A cap and trade system works by allowing market forces to find the most economical solution to reducing carbon dioxide emissions. First, the government determines the total amount of emissions it will allow by polluters and hands out credits for free up to a certain point. The carbon credits give these firms the permission to emit a certain amount of CO2, such as a ton per year per credit. This is the cap, or limit, set on CO2 emissions for polluters. Each polluting firm gets their credits based on some calculation by the government. These firms go about their business as usual and emit their allowance. However, some firms may find that they are emitting too much and some may find that they are actually emitting less than their allowance. Here we have set up a potential market to trade permits. The firm that is emitting too much CO2 can pay the firm that is under its allowance for the spare permits it isn’t going to use to be able to meet the emissions cap. Alternatively, if a firm finds it too costly to reduce its emissions, it could find another firm that would find it cheaper to reduce its emissions and buy the unused permits.

These types of situations allowing for trade may arise for various reasons such as rise in one industry causing higher CO2 emissions and a fall in another causing its CO2 emissions to fall or due to costs of abatement technologies. The cost to reduce another ton of CO2 is called the marginal abatement cost (MAC). As a firm reduces its own emissions, it becomes more and more expensive to remove the next ton as it becomes harder to do so, so the MAC rises as emissions are reduced. Lets say we have Firm 1 that is emitting CO2 and not abating very much and Firm 2 that is already using quite a bit abatement technology. When the proposed cap-and-trade system is put into place, Firm 1 will find it pretty cheap and economical to invest in abatement technology and Firm 2 will find it difficult and not economical to invest in technology. The additional costs of abating to Firm 2 to meet its cap are much more than Firm 1’s costs. Firm 1 also finds that it is economically viable to reduce its emissions to below its allowance, therefore endowing it with extra permits. In this hypothetical and very plausible situation, a potential market for carbon credits has been created in which Firm 2 could reduce its costs of abatement by buying the extra permits from Firm 1 instead of investing in more technology. It could also pay Firm 1 to reduce its emissions even further at a given price that would be economical for both.

In the market for carbon credits, the costs of abatement are shared among the firms. This allows each firm to figure out its cheapest and most economically viable solution, whether that is, reduce its own emissions and sell the extra credits or to buy up credits in the market. Prices for these credits are determined by the market based on supply and demand. If cutting emissions is costly, demand for permits rise and so will the prices. However if cheap technologies to reduce emissions are available, the price will fall. A market and price is set up and the government has capped emissions. Everything should work out nicely, however an assumption has been made that the allocation of CO2 credits is determined fairly.

As is the case in all politics, there are favorites, influential lobbyists, and corruption. Politically connected firms would be most likely to receive a favorable amount of credits while others would not. An example of politically connected firms would be Boeing or Lockheed Martin or any defense-oriented firm. Firms and even whole industries with a lot of money in Washington D.C. in the form of influential lobbyists could even receive preferential treatment such as agriculture. Giving firms and whole industries preferential treatment will have adverse effects cap-and-trade system. The European Union currently has a cap-and-trade system in place for CO2 emissions, which has had some problems. One such problem occurred in Germany when the government, keen to protect its coal industry, awarded too many free credits to coal-fired electric power plants. The owners of these plants then charged their customers for carbon costs the plants never had to pay. The E.U. governments also oversupplied the market with permits, which caused the price of a ton of CO2 emissions to fall from $40 to about $1.

Another fallback of a cap-and-trade system is the possibility of high price volatility. If the market is oversupplied or undersupplied with permits, as shown by the mistake of EU governments, it can greatly affect the market’s prices. The government would have to be able to measure how much CO2 is being emitted by the whole economy, which may be a difficult, but possible, task to do. Uncertainty in the market can also lead to volatility in prices. Uncertainty can take the form of indecision by the government on new proposed rules and regulations, inadequate and untimely market information, the direction of the economy, and abatement technology and their prices. The cap-and-trade system that the United States has in place for sulfur dioxide emissions experienced a substantial increase in prices of permits due to the uncertainty of the implementation of a new program when prices doubled within a six month period. Also, how quickly quality information can get to all market participants will also affect how prices will react. If the government over- or undersupplies the market, if it can get timely information on those facts, it can revise the number of permits in order to keep the market stable just as the Federal Reserve does with the money supply. The market will also be able to correctly price carbon credits with timely and accurate information. The direction of the economy will also affect prices in that when the economy strengthens, more pollution will occur causing a rise in demand and prices for permits. The opposite is true as well when the economy weakens. Abatement technologies, as discussed earlier, affects credit prices as costs of technologies change or as new technologies are introduced. The price established in the market becomes the marginal abatement cost for all firms, so based on that price firms decide whether to trade carbon credits or adopt technologies to reduce emissions.

Putting a price on CO2 emissions will inevitably cause all fossil fuel prices to rise. With a cap-and-trade system, how much fuel prices would rise would depend on the market price of carbon credits, leading to added volatility in already volatile energy markets such as oil. Also, the fact that implementing and maintaining a cap-and-trade system is a very complex process, it could take years to break ground and cost lots of money to do so.

With these setbacks, a cap-and-trade system also has its benefits. One thing that should be obviously clear is that the cap essentially guarantees CO2 emissions reductions. This can provide the most environment-friendly solution. In addition, firms can trade carbon credits amongst themselves and invest in technologies depending on their respective prices, so they have options as how to find the most financially effective solution, providing a smaller impact on the economy in terms of short-run costs to the firms while keeping output relatively the same.

With a cap-and-trade system, new business can spawn in the form of trading credits. Just as a stock market operates, there will need to be a person or a computer system that can match a seller and a buyer in order to create the market. In fact, there are already businesses doing just that in the EU and businesses are getting ready to set up trading desks in the United States while betting that a cap-and-trade system is the way the US will implement a CO2 emissions reductions policy. The market for the carbon credit trading business in the US is currently estimated to be worth $1 trillion annually by 2020.

The Carbon Tax System

A carbon tax system is actually self-explanatory in that the government decides to levy a tax on businesses that emit CO2 into the atmosphere. Emitting a ton of CO2 causes harm, called an external cost. A value is placed on the extra harm that an extra ton of CO2 causes, called the marginal external cost (MEC). The government taxes those causing the external harm and sets the tax at the value of the MEC in order to produce an efficient outcome in the market. There is no setting up trading markets or determining a set limit on emissions. The government simply determines a goal on emissions of CO2 for a certain period and sets a tax on a ton of emitted CO2 that it thinks will allow it to reach that goal.

This system reduces CO2 emissions because it, by itself, reduces output and therefore fewer emissions. It does so by forcing a higher price on consumers and a lower price on producers as the tax raises and eats away at the price respectively. Due to the higher price to consumers, they demand less and due to the lower price to producers, they supply less.

At face value, a person will say that a carbon tax is not the way to go because it obviously reduces output and effectively reduces output of the economy, hinders further growth, and raises prices. However, this may be true another thing is also true. Any firm is in the business of making money and is an investment for those who own it. As with all investments, people try to maximize their investment and minimize their tax obligations due to their investment, such as choosing between a traditional IRA and a Roth IRA. Therefore, what each firm must individually decide to do now is whether to cut back on production or to invest in technology in order to reduce its emissions. The tax essentially sets a market price for a ton of emitted CO2 for all firms. The decision to invest in technologies or to cut production is based on which option is most economically viable. With the tax alone, both firms and consumers lose some of the surplus from producing or consuming more at a lower price. In other words, with the tax and everything else being equal, there are surpluses to be regained by both consumers and producers that were effectively taken away by the tax. If a firm finds that it is cheaper to invest in emissions reductions technology, it can raise its output as it faces a higher price to produce at in which it will want to supply more product, reducing the price that its consumers face would face. This pushes the market the firm is in closer to the equilibrium that was established before the tax was put in place. This regaining of the lost surplus of producing more at a lower price will pay for the investment in the technology and will keep its emissions at the same level before the tax or even below it while at the same time reducing tax obligations.

A fallback of carbon taxes is in of itself. It is a tax and people, businesses, and politicians do not like the idea of new taxes for their own reasons. Higher taxes are usually a hindrance to economic growth, however, in this case is most likely only in the short run. Firms would have to find ways to cut back emissions and the easiest way to do that at first is to cut back on production. Firms would then look into other options such as investment in technology and cleaner fuels, in which it takes time to devise a strategy and implement it. Once a strategy is put into action, production can begin to return to pre-tax levels. Additionally, there is no guarantee that emissions will be reduced to a certain level. It is a possibility, however, it is unlikely as businesses maximize profits and if it is cheaper to avoid the tax and reduce emissions, one will do so.

The benefits of a carbon tax are many. They can be implemented much more quickly than a cap-and trade system. Also, since there is no market or trading involved, the tax, or price, is set at a level for a given time period, leading to greater price stability in energy markets as compared to a cap-and-trade system. With clear, long-term price signals, companies can invest intelligently to lower emissions. Carbon taxes also reduce the opportunities for the government to show favoritism to individual firms or whole industries and exploitation by politically connected firms, industries, and lobbyists that can be experienced in a cap-and-trade system. Additionally, many economists argue that carbon taxes are the most cost-effective way to limit global warming emissions.

[Urabus GodofTraction]

Cap & Trade is as close to truth in legislation as we get these days.

Remove the ampersand...

[dusred]

When cap & trade was going to through congress they got something like 1.5 million phone calls from us and the vast majority of them being against the bill. I'm very surprised it still passed. Sounds like there will be lots of congressmen who will loose their jobs when election time comes around.

[WDRacing]

What we need is no new legislation for 2 full years. Fix what ya got or STFU. No new taxes, no new anything. Our Gov is a total failure and needs to be redone from scratch to include impeaching the current POTUS for treason and any other thing I can think up. Because he's a puppet and an ignorant one.

[smockers83]

You know what I've noticed this year? Representatives seem to vote in order to please party leaders, such as Pelosi and Obama. This reminds me of the things I've heard about the Third Reich and Stalin's government. Not saying that that's where we're headed or anything, but it's something to think about.