Monday, April 21, 2008

Cap and Trade Preview

All of the Presidential contenders still standing have endorsed a cap and trade system in response to global warming worries. None of them have talked about the costs of such a system. None of them have talked about the practical difficulties of implementing such a system. And none of them have talked about the EU system which has failed to produce the expected reductions in emissions. So if you want to see how a system like this would work, it makes sense to take a look at the existing ones to see how they are doing. The EU system is not working:

Europe's Dirty Secret: Why the EU Emissions Trading Scheme isn't Working

EU Climate Change Plans "A Failure"

EU plans fail to spark carbon price rally

EU Greenhouse-Gas Emissions Rose 1.1% Last Year

Of course, maybe it's just that the Europeans don't know what they are doing and us Americans will get it right? Well, we have a real world example. California is trying to implement it's plan right now and guess what? They're having some problems:

Fighting global warming is the feel-good cause of the moment.

But in California, the self-congratulation that followed the 2006 passage of the nation's first comprehensive law to curb emissions of planet-warming greenhouse gases is fast turning to acrimony.

A ferocious behind-the-scenes brawl over how to regulate electricity plants, the biggest source of carbon dioxide after motor vehicles, has pitted Southern California's public power generators against its for-profit utilities.

Why? Because some taxpayer-owned utilities, such as Los Angeles' Department of Water and Power, get close to half their electricity from the nation's dirtiest energy source: coal.

And under the system envisioned by Gov. Arnold Schwarzenegger to implement the greenhouse gas law, utilities would probably be required to buy the right to pollute from the state.

There is a real cost to reducing CO2 emissions and someone will pay. Politicians are promising both a cap and trade system and increased investments in alternatives. But that may not work out as planned:

Los Angeles' customers, who thus far have benefited from some of the lowest rates in the state, could shell out $450 million to $700 million a year -- money that the utility was planning to spend building wind and solar plants. Smaller coal-reliant cities, such as Anaheim, Burbank and Pasadena, also could pay high fees. Customers' bills could soar under such a plan, municipal utility directors, including Nahai, warn.

So if you give generous permits for polluting as they did in the EU, you get no reduction in CO2 emissions and a collapse in the price of carbon. If you punish the worst polluters by making them buy permits, they won't have the money to invest in alternatives. Michael Peevey, president of the California Public Utilities Commission says:

There's no free lunch," Peevey warns. "We have to reduce CO2 by 174 million tons by 2020. But no one wants to face up to the cost. Everyone wants everyone else to pay."

I am not sure of the science behind global warming or the need to reduce carbon emissions. But I am damn sure that government intervention in the market will not produce a satisfactory result.

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