Page 1 of 2Next
Could Cap and Trade Cause Another Market Meltdown?
The same Wall Street players that upended the economy are clamoring to open up a massive market to swap, chop, and bundle carbon derivatives. Sound familiar?
Mon Jun. 8, 2009 3:00 AM PDT
You've heard of credit default swaps and subprime mortgages. Are carbon default swaps and subprime offsets next? If the Waxman-Markey climate bill is signed into law, it will generate, almost as an afterthought, a new market for carbon derivatives. That market will be vast, complicated, and dauntingly difficult to monitor. And if Washington doesn't get the rules right, it will be vulnerable to speculation and manipulation by the very same players who brought us the financial meltdown.
Cap and trade would create what Commodity Futures Trading commissioner Bart Chilton anticipates as a $2 trillion market, "the biggest of any [commodities] derivatives product in the next five years." That derivatives market will be based on two main instruments. First, there are the carbon allowance permits that form the nuts and bolts of any cap-and-trade scheme. Under cap and trade, the government would issue permits that allow companies to emit a certain amount of greenhouse gases. Companies that emit too much can buy allowances from companies that produce less than their limit. Then there are carbon offsets, which allow companies to emit greenhouse gases in excess of a federally mandated cap if they invest in a project that cuts emissions somewhere else—usually in developing countries. Polluters can pay Brazilian villagers to not cut down trees, for instance, or Filipino farmers to trap methane in pig manure.
Advertisement
Advertisement
In addition to trading the allowances and offsets themselves, participants in carbon markets can also deal in their derivatives—such as futures contracts to deliver a certain number of allowances at an agreed price and time. These instruments will be traded not only by polluters that need to buy credits to comply with environmental regulations, but also by financial services firms. In fact, a study (PDF) by Duke University's Nicholas Institute for Environmental Policy Solutions anticipates that if the United States passes a cap-and-trade law, the derivatives trade will probably exceed the market for the allowances themselves. "We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market," says Robert Shapiro, a former undersecretary of commerce in the Clinton administration and a cofounder of the US Climate Task Force.
Banks like JPMorgan Chase, Morgan Stanley, and Goldman Sachs already have active carbon trading desks that deal in instruments connected to Europe's cap-and-trade system and voluntary markets here. But business will explode if a cap-and-trade system becomes law. So it's no surprise that the financial industry has taken an intense interest in the fine print of the Waxman-Markey bill. According to data compiled by the Center for Public Integrity, the financial services industry has 130 lobbyists working on climate issues, compared to almost none in 2003. They represent companies like Goldman Sachs, JPMorgan Chase, and AIG (before it was shamed into temporarily halting its lobbying activities last fall). The industry "wants lawmakers to create a brand-new revenue stream for its bottom line, and cap and trade would do it," says Tyson Slocum of Public Citizen, who is a member of a Commodity Futures Trading Commission (CFTC) advisory committee considering how carbon trading should be regulated.
Among environmental groups, there is, understandably, less focus on the finer points of financial regulation. "The derivatives side is not something that a person who comes to the table worried about carbon emissions has on their agenda," says Michael Greenberger, a derivatives expert at the University of Maryland who has also served in the CFTC and the Justice Department. "Those people—and they're fighting a good battle—opened the door."
Already, the industry has achieved its main objective: The Waxman-Markey bill would create a big, convoluted market for carbon derivatives. Experts from the Congressional Budget Office have said that the most stable and effective form of cap and trade would involve a system in which the government periodically sets prices in much the same way that the Fed determines interest rates. That would prevent volatility, which would in turn remove the temptation to gamble on big price swings. In other words, it would provide far less opportunity for wheeling and dealing—and profits. Rep. Jim McDermott (D-Wash.) offered a proposal for a managed-price cap-and-trade scheme, but failed to gain any traction. Meanwhile, industry groups like the International Swaps and Derivatives Association pushed for a system in which a "broad suite" of financial products can be traded, and that's what Waxman-Markey delivers.
In an especially audacious move, the industry also argued that cap and trade should allow the very same types of unregulated instruments that helped spread risk throughout the financial system like a cancer, contributing to the economic meltdown. In particular, it lobbied for "over the counter" carbon derivatives—deals conducted directly between two parties with no one monitoring the risk. (Perhaps the most notorious form of OTC derivative is the credit default swap, which crippled AIG when it issued too many high-risk swaps while lacking the money to cover them.)
On this front, however, Wall Street was less successful. The day before the bill passed out of committee, Rep. Bart Stupak (D-Mich.) inserted language requiring all allowance derivatives to be either traded on an exchange or cleared by an organization registered with the CFTC. This would provide a paper trail for regulators, although the reporting requirements for clearinghouses are less stringent than those for public exchanges. Stupak also added limits to prevent speculators from cornering too much of the market. Still, the bill leaves many vital specifics to the White House, directing the president to form a task force to determine precisely how to avoid "fraud, market manipulation and excess speculation." Andy Stevenson, finance adviser at the National Resources Defense Council, says, "I would feel comfortable if much more of it were explicit." He applauds the bill's "spirit" but cautions that "the details are important."
Page 1 of 2Next
Comments
cap & trade & NAFTA
Submitted by shane menken on Mon Jun. 8, 2009 10:11 AM PDT.
First, we need a simple carbon tax to allow the government to cooerce business into not polluting. Then we need citizens to quit accepting pollution.
But, it might be to late. They way I understand this whole cap&trade thing, is that the pollution becomes a market-valued commodity, a corporate asset that can be exchanged in a market place for capital/value.
Enter NAFTA, especially Chapter 11 about government "takings". This prohibits deeply a governments ability to enforce its own laws if the result is a loss in corporate profit. So how can one ban pollution if the ability to produce and trade that pollution is a market-valued commodity, and limiting would be a "takings".
Ouch, is all I can say.
And of course the whole
Submitted by TOWcritter (not verified) on Mon Jun. 8, 2009 10:59 AM PDT.
And of course the whole thing is predicated on mother nature. Global warming. Scientifically proven to be a load of crap. Rich elitists making more money off of the sheeple. Fools.
Members of Congress need to
Submitted by U.S. Climate Ta... on Mon Jun. 8, 2009 12:55 PM PDT.
Members of Congress need to look into the alternatives to cap and trade to avoid the potential market manipulation and adverse economic effects. I hope they’ll consider a revenue-neutral carbon tax, which is more transparent and straightforward to cap and trade.
Bubble-icious
Submitted by Lance Watkins (not verified) on Mon Jun. 8, 2009 1:51 PM PDT.
Yippee.. another bubble is coming?
The inherent unfairness of downtime in between market speculation compromises the rights of the wealthy, who are downright downtrodden..!
The very idea of considering fixing perceived 'problems' caused by rampant speculation of prior bubbles causes toil and trouble for those who clearly have the very best intentions of the Nation at heart.
I say let the free markets reign..! Why stop with trading pollution..?
Let's trade "credits" for (clean) air & water & food.
After all, aren't they toxic and polluted too..?
Insiders know this is all smoke-and-mirrors
Submitted by A view from the inside (not verified) on Mon Jun. 8, 2009 4:40 PM PDT.
I work in an industry that is a very heavy polluter -- 1% of the US's annual carbon emissions. The big bosses in this sector are rejoicing at this piece of legislature. Why? Because this "law" is written to make everyone feel good, without any real substance.
The nitty-gritty is that the law sets things up so that if the offset costs for carbon emissions ever rise above $35 per ton, then the government guarantees it will step in and rewrite the caps. Multiple industry analyst reports show that it's cheaper to buy offsets than to actually reduce emissions when offsets are $35 or less. It's only when offsets are above $35 does it financially make sense for them to spend the money in modifying the equipment to reduce emissions.
So when the magic number of $35 per ton for an offset is hit, the government has promised to jump in and rewrite the law so the corporations don't have to actually pay the $35 per ton for offsets nor do they have to pay for renovations because the cap is legally raised. Quid pro quo. Nothing changes.
Everybody comes out smelling like roses because the govt officials look good since there is proof they did something about carbon emissions & global warming, the big polluting corporations are happy they don't have to do anything differently, and the general populace is pleased because the news reports this legislation as progress and so they feel good that something is being "done about it." (Ha.)
The big losers: environmentalists & the earth. They just got the wool pulled over their eyes. Why aren't they jumping up and down screaming bloody murder?
I wish they would.
In the mean time the big polluters are laughing up their sleeves at the rest of us chumps.
Can you elaborate a bit on
Submitted by BizMarkie (not verified) on Mon Jun. 29, 2009 10:20 AM PDT.
Can you elaborate a bit on this $35 number? I found reports that conclude that a $35/ton cap price would result in a 10% reduction in carbon emissions, but a quick search in the full text of H.R.2454 didn't reveal $35 as a level where the caps would automatically be adjusted.
Can you point us to the section/line in the bill that covers this?
ALWAYS Smoke and Mirrors
Submitted by Lightning Joe (not verified) on Mon Jun. 8, 2009 5:18 PM PDT.
"Insider" is quite right. The dominant meme in our culture is now the continuing, endemic deception by parties in a position to profit from continuing the status quo. Hence you have parties like "TOW critter" insisting not only that there is no global warming happening, but that it's been "proven" -- "scientifically" -- to be baseless in fact. I don't know what sort of profit Mr. TOW takes away from his cluelessness, but the cost of his misguided deception to the rest of us, is quite real and egregious.
Insider's tenet that moneyed interests are using faux-capitulation to make inroads of their own is only too accurate. Witness the rash of "energy" companies (they used to be called, more frankly, "oil" companies) claiming to be on a crusade to save the climate and earth itself, by (ahem!) selling out their main cash-cow? Anyone believe that?
Witness big retailers doing their best to water down the requirements for "organic" labelling, and then rolling out endless "organic" product lines, to take advantage of the betrayed trust of the health-conscious public.
And last, witness the rush of Democratic Representatives selling out liberal principles in order to satisfy their campaign funders that they are FOR big business and big profits.
From healthcare (a looming told-you-so debacle) to the environment, our capital-is-God culture is incapable of any change that doesn't steal more from the less fortunate, to enrich the already-rich. Healthcare investigators have already ruled out single-payer, because it wouldn't make the old boys any richer, and the CCAT debate is already conditioned to ensure that the money games continue.
Better luck to the next generation; because its all over for this one.
Energy Confusion [Enron II]
Submitted by Robert Michael Foster, MA (not verified) on Mon Jun. 8, 2009 6:47 PM PDT.
No one is at fault with our energy policy, because "we know not what we do." But we are all responsible for what we do, say, and think -- consciously and unconsciously. If we had been raising carbon taxes a penny a year since Jimmy Carter, we could have improved our infrastructure, had a more efficient transportation system with faster more energy efficient rail, and developed real energy alternatives. Instead, we had scams, like the hydrogen hoax. See: http://tinyurl.com/hydrogenhoax. [& http://tinyurl.com/hydrogenknol]
Sen John McCain supported the cap-and-trade alternative. Obama must have chosen the cap-and-trade alternative to a carbon tax because too many Republicans believe in cap- and-trade markets. And, most Republicans would have been unmerciful in opposing the constitutional "common welfare" of a carbon tax.
The best Republicans and Democrats I know support the simpler market alternative of a carbon tax, instead of the Enron-like cap and trade. But most Republicans have now run away from their own cap-and-trade idea. Markets only work well with ethics and transparency. At least now we can all tell our Republican and Democratic representatives to work towards making their cap-and-trade alternative ethical and transparent. From my letter to editor of Frederick News Post on 27 May '09
Monkey See No Evil
Submitted by Michael L. Wagner on Tue Jun. 9, 2009 9:57 AM PDT.
Here Read:
+ New climate change legislation overlooks a major GHG source: industrial ag / Grist Magazine:
–”The bill fails to address greenhouse gas emission reductions from agriculture, factory farms, and animal manure whatsoever–and even goes the extra mile to specifically exempt the entire sector from any type of regulation.”
“Enteric fermentation is literally the largest source of methane emissions in the entire country.”
+ EPA’s Landfill Methane Outreach Program / EPA:
–”Municipal solid waste landfills are the second largest source of human-related methane emissions in the United States.”
“At the same time, methane emissions from landfills represent a lost opportunity to capture and use a significant energy source.”
Also read:
+ Beware emissions trading, airlines stand to make billions / Mother Jones,
+ The Carbon Folly / BusinessWeek,
+ The Case Against Carbon Trading / Transnational Institute:
–”…Citigroup’s Peter Atherton confessed that the European Union’s Emission Trading Scheme had ‘done nothing to curb emissions.’ He admitted,‘Prices up, emissions up, profits up …’ Who wins and loses? Coal and nuclear-based generators–biggest winners. Hedge funds and energy traders–even bigger winners. Losers … Consumers!”
Rather than cap-and-trade, the Govt. should set caps on GreenHouse Gas emission, then provide 0-interest loans for companies to Go Green (when such cannot afford to).
Also Read:
+ Loophole may mean bigger, not smaller, cars / MSNBC:
--"New rules may actually encourage automakers to build behemoths."
"Too bad the rules will discourage automakers from manufacturing the kind of small cars that the Obamaites favor and, in some cases, encourage carmakers to do exactly the opposite. That's right: make some models bigger."
"... the legislation, while forcing a significant boost in fuel economy, has loopholes big enough to drive a truck through."
"But say a big SUV misses its target by one mile per gallon. A carmaker could just make the vehicle a bit larger, allowing it to hit an easier fuel economy target."
"'The system doesn't do anything to encourage smaller vehicles,' ... And even if gasoline prices rise again and prompt consumers to look for smaller cars, he says, the new rules give automakers less incentive to sell more of them.
+ From Bagels to Coal Fires: An Unorthodox Economist Keeps Pushing for Change / NY Times, 2007:
–”… the abundance of underground coal fires in abandoned mines and other places that not only waste coal but contribute mightily to worldwide carbon dioxide emissions.”
”… underground fires in China alone contribute as much CO2 to the atmosphere each year as all the cars and light trucks in the U.S.”
Meanwhile, the Climate Change Bill grants BILLIONS in subsidies to Clean Coal.
Here Read:
+ The Illusion of Clean Coal / The Economist:
+ Trouble in store--Carbon capture and storage / The Economist:
+ The Dirty Truth About Clean Coal / BusinessWeek,
+ King Coal's Latest Con--Clean Coal is Not Clean / CommonDreams
Wall street players caused this mess? So did the government!
Submitted by SoCal_Mark (not verified) on Wed Jun. 10, 2009 4:31 PM PDT.
The federal government played a role in creating this mess because it was the federal reserve bank of Boston that released in 1992 the document called "closing the gap" that outlined how banks could lower their lending standards so that more people with bad credit can buy homes. This is just one part of the governments role in this mess.
There is blame for everybody (dems, reps, banks, greedy people, etc.) for this mess and I believe that a commission similar to the one that looked into the cause of 911 needs to be put in place so that we can find exactly how we got here. So far, I've read the republicans are for this and democrats aren't. What does that say?
Cap and Trade will kill the economy
Submitted by AntonioSosa (not verified) on Wed Jun. 10, 2009 5:34 PM PDT.
No patriotic and informed American can support the global warming/cap and trade scam, more fraudulent than any Nigerian scam.
Cap and Trade “would be the equivalent of an atomic bomb directed at the U.S. economy—all without any scientific justification,” said famed climatologist Dr. S. Fred Singer. It would significantly increase taxes and the cost of energy, forcing many companies to close, thus increasing unemployment, poverty and dependence.
Cap and trade represents huge taxes and cost increases, which will hurt mostly the poor and the middle class. Cap and trade will give dictatorial powers to Obama and will further enrich his billionaire friends (Gore, Soros, Goldman Sachs, Obama’s Chicago Climate Exchange friends, GE, etc.) -- all at our expense and at the expense of our children and grandchildren.
We need to go in the OPPOSITE direction of cap and trade -- use all energy resources and develop new resources as soon as possible, as much as possible.
Man-made global warming a hoax
Submitted by AntonioSosa (not verified) on Wed Jun. 10, 2009 5:38 PM PDT.
More and more scientists and thinking people all over the world are realizing that man-made global warming is a hoax that threatens our future and the future of our children.
More than 700 international scientists dissent over man-made global warming claims. They are now more than 13 times the number of UN scientists (52) who authored the media-hyped IPCC 2007 Summary for Policymakers. http://www.climatechangefraud.com/content/view/3562/218/
Additionally, more than 30,000 American scientists have signed onto a petition that states, "There is no convincing scientific evidence that human release of carbon dioxide, methane, or other greenhouse gases is causing or will, in the foreseeable future, cause catastrophic heating of the Earth's atmosphere and disruption of the Earth's climate." http://www.petitionproject.org
We pray that honest leaders – both Democrat and Republican - are able to save us from Obama's criminal global warming/cap-and-trade scam.
Waxman-Markey Cap and Trade Bill - Massive Securities Fraud
Submitted by Anonymous (not verified) on Mon Jul. 13, 2009 8:44 AM PDT.
Interesting Adjunct To The Waxman-Markey Cap and Trade Bill Involving Massive Securities Fraud
The Waxman-Markey Cap and Trade Bill and Proposed National Health Care Legislation Opens Door for Massive Stock Fraud by Al Gore “Climate Change Ambassador Program” Associate Maurice Stone, newly elected chair of the New Energy Committee for the National Black Chamber of Commerce (NBCC)…. Click on the Link to read the open letter.
http://www.resistnet.com/group/lonestarpatriots/forum/topics/waxmanmarke...
Great article on carbon trading
Submitted by Ricardo Coelho (not verified) on Wed Jul. 22, 2009 2:37 PM PDT.
I'll put a link on my blog.
dang
Submitted by woof (not verified) on Tue Nov. 17, 2009 7:41 AM PST.
This is a terrible waste of resources for an urban legend started by AL Gore.
MoJo Comments: Send Us Your Feedback
We changed our spam software to better filter comments. Should you encounter any issues, please let us know.
