Investment Bankers = Carbon Traders: Entrusted With Earth's Future?

financial trading desk cap and trade photo

Trust In The Speculator Class Eroded
We've all read about the world's financial system collapsing, putting livelihoods, corporations, and national economies at severe risk and completely changing the dynamic of the US Presidential election: all triggered by "derivatives" trading schemes enabled by the US Congress, with the concurrence of several US Presidents.

Cut to the carbon chase. The very people that caused the banking system melt down - promoting and utilizing unregulated systems - are salivating at getting their little trading fingers into the carbon cap and trade business. And that's a problem.

I'm guessing most people feel as I do about the present financial crisis: powerless and unprepared to comprehend, beyond the headlines and expert 'talking points', the cause, solutions, and plausible outcomes. (The more you read, the less you understand.) As a result, investment banking and financial "trading" and "hedging" are probably among the least trusted professions now: right down there with welfare cheats and Nigerian email scammers.

And, what exactly is the link to environment you ask?Management Systems To Restore The Trust
Carbon "Cap and Trade" schemes have been billed as the free market solution to climate crisis. But wait. Wasn't it the "free market" crowd that just hosed everybody? And, will someone tell me, again, why we should trust financial "traders" and "hedgers" with the future of the earth?

Turns out that those involved in carbon cap and trade mechanisms have been giving the problem of low trust some thought. 'How shall we regulate?' is the question.

...wide swings in allowance prices would raise compliance costs for regulated firms and impair the price signal for investments in emission abatement. The reality or even the appearance of market manipulation, gaming of the system, or speculative bubbles could also threaten the sustainability of the program, particularly during its early years of implementation. Careful design of allowance auctions could reduce the risks of collusion. The provision of auction purchase limits and a non-competitive-tenders facility could help ensure that all regulated firms had a chance to obtain the allowances they needed in auctions.

Identifying manipulative behavior and speculative excesses in secondary markets would be more challenging. Market surveillance could be aided by designing allowance registries in part for that objective.

Via:Center For Clean Air Policy, Market Manipulation, Domestic Climate Policy Initiative Preventing Market Disruptions in Cap-and-Trade Programs (pdf file)

Know what? Plain old emission limits or carbon taxes are sounding better all the time. "Trust us" alone isn't going work for me for a lo o o o o n g time.

Let's change the track: from the emotional to the pragmatic. Is there a compromise position that would make me, the US Citizen, consider a cap and trade program?

Echoing the call, 'yes there is.'

We know from our experience how long it took, from institution of the US acid rain, cap and trade program - the acid rain C&T; was the functional prototype for all other cap and trade programs in the world - to the point when lasting, positive results were seen* (4 - 5 years).

A viable compromise, then, could entail a fail-safe carbon tax regime set to kick in, abruptly, should a hoped-for cap and trade progress target not be met. (Based on what was learned from optimizing the acid rain program in Phase II, we should hope that the progress metrics would be taken in 2 to 3 years, with the trigger set to pull at the next fiscal quarter ending.)

Of course there would have to be built in protections for those who already paid into emission reduction designs, using the bought credits as a time buffer, or spent capital implementing reductions. That kind of detail is best negotiated with all the parties at the table.

Chronology of US Acid Rain Program

Title IV of the 1990 Clean Air Act established the allowance market system we know today as the Acid Rain Program. Initially targeting only sulfur dioxide, Title IV set a decreasing cap on total SO2 emissions for each of the following several years, aiming to reduce overall emissions to 50% of 1980 levels. The program did not begin immediately, but was implemented in two stages: Phase I (beginning January 1, 1995) and Phase II (starting January 1, 2000).
Via:Wikipedia, History

Image credit:Desk Solutions, financial trading desk

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