The world is getting warmer! Humans are polluting and their pollution is making the world warmer faster! Unfortunately even I agree with this claim. The debate is how much humans really impact the rising temperatures. But that debate is not for today.
If we want to curb our use of polluting energy sources, the government needs to enact some kind of legislation, else we’ll never get on board since energy is so cheap (yes, this is cheap). One of the most popular suggestions to control the amount of CO2 we pump into the air is a system that is now known as cap and trade.
Cap and trade is appropriately named, it starts with the government putting a cap on the amount of CO2 that can be placed into the air. This regulation is done at the corporate level, so think about power companies. They are also given credits which allow them to expel their CO2. If the company uses less than they were allotted, they can sell their credits to other firms that would like to pollute more than their fair share. Over time the cap would be reduced so as to encourage the economy as a whole to reduce their carbon output. Everyone wins right?
Actually, yeah. But the funny thing is the biggest winner may be Wall Street. Almost as quickly as a cap and trade program is put in place, a market for exchanging credits will be created. Wall Street will pounce. Carbon credits are basically a right, but not an obligation to pollute. This is the same setup as an investment called an option. High finance would dominate this market in the same way they dominate commodity markets for items like oil and gold. The government could keep them out and only allow energy companies to trade, but all that will mean is energy companies will create trading departments and hire away Wall Street MBAs. Cap and trade should be very good for Wall Street.
Of course when I said everyone wins, I lied. If everyone wins, no one really wins. The system might actually work if every developed nation on the planet played along. But almost as soon as cap and trade is put in place, American made products would lose even more ground to Chinese exports on a level of price. Energy would be more expensive here than in China, and therefore Chinese products get a win. The economic turmoil is unknown, and many would prefer to keep it that way.
The funniest thing about cap and trade is that it’s nothing but a big front. Do you want a carbon tax? Want the price of oil to go from $100 to $200 over night to help curb our consumption? Nope. Americans are notorious for wanting to be taxed indirectly. You idiots (including me) will never understand that any tax levied on a company effectively taxes you as well. Cap and trade taxes corporations, this cost will be sent on to you in the form of more expensive products and devaluing of the dollar due to increased imports from the likes of China.
The carbon tax may be more efficient albeit less politically favorable. Sure we’d all complain about the increased cost of energy in the short run, but what you fail to understand is we immediately get a price cut in the cost of energy as well. If oil is $100 a barrel and a $100 tax is levied the price goes to $200. But demand will fall so sharply, you’d find oil somewhere between $120 and $180 a barrel. The tax revenue would be returned to us in the form of subsidized green energy initiatives and all those other things. What about China? Well that can be fixed too with some help of the WTO. We can’t force China to tax their citizens, but we can tax China. They are reliant on exports to those fat capitalists in America, so we keep American products competitive by placing hefty tariffs on imports to the States. China will have to pay more and we’ll either redistribute those tariffs in further subsidies to taxpayers or they’ll get on board with a carbon tax to keep the playing field level.
That’s probably a lot to digest. The important takeaways though are that cap and trade may not be the most efficient means of controlling our carbon emissions, despite what environmentalists and economists might say. Cap and trade has become such a political issue these days that in all likelihood nothing will happen. This should keep the Libertarians happy. In closing, don’t pass judgment on me about these issues, I’m neither for nor against cap and trade. I’m merely pointing out what’s going on behind the scenes and telling you the stories the traditional media won’t tell you. If you want to add by talking about the downside of a carbon tax, feel free, I’ll do that post sometime.
Photo: azrainman
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. |
| Related Websites |
Said,
Although you make several good points, I think it is naive to assert that the US would be immediately prepared to add a tariff on products made in China and then imported into the U.S.
China is seen as the next frontier in consumption. US businesses hoping to sell their products in China would fear retribution from a tariff placed on Chinese goods.
The other problem with a Carbon Tax as opposed to a Cap and Trade system is that the tax uses defined incentives (higher prices) to achieve an uncertain outcome (reduced pollution). Alternatively, a Cap and Trade system defines a specific outcome (the amount of pollution allowed) and allows the market to find the correct price. Clearly achieving a definitive outcome is better and using the market to set a price is better.
As for the Wall Street profiteering. Yes, that will happen. That’s what they do.