Muse Droppings
By:
C.C. Youngren

Cap’n Trade

Look, up in the sky!  It’s a Default Swap guru! No, it’s an Insurance Exchange maven—no, it’s Cap’n Trade!

Yes, it's Captain Trade, strange visitor from another market who came to Earth with powers and abilities far beyond those of mortal bean-counters. Cap’n Trade, who can change the path of mighty carbon footprints, bend financial instruments in his bare hands; and who, disguised as Ecco Friendly, mild-mannered broker for a great metropolitan investment bank, fights a never ending battle for dollars, loopholes, and the American way.

OK, I got a little carried away—mea culpa.  I shouldn’t lead with cynicism; I should develop it with subtle care and logic.

Cap & Trade is one of those ideas born in altruism and nurtured in optimism only to run smack into those detail devils in late adolescence and unintended consequences in maturity.  We have seen this before.   Sub-prime loans were a mechanism to make housing affordable to working poor and to instill a sense of “ownership” that the public housing projects of yore ignored.  This mechanism metastasized into a free-for-all of MacMansion flipping, balloon loans and a blizzard of unsecured paper packaged & repackaged in a dizzying spiral staircase of vapor.

Managing pollution by capping emissions is a fine idea, maybe even an essential idea.  This assumes, of course, you know exactly what you want to measure, can monitor it accurately & efficiently, and have the regulatory muscle to enforce it.  All that being said, the “cap” aspect is the easy part, it is the “trade” piece that conjures up images of Wile E. Coyote unpacking his trunk of Acme paraphernalia.

The genius of Cap & Trade is said to be in its flexibility.  Rather than simply fining polluters (in this case those installations which emit greenhouse gases in quantities exceeding their assigned cap), companies are issued “carbon credits.”  It is only slightly unfair to consider these licenses to pollute.  If you run out of credits you can purchase more from those under-the-cap institutions who hold a surplus—or from credit brokers who have invested in such purchases.  The theory is that overall emissions are strictly limited while the skyscape may be populated locally by the overs & unders.

If the cap is ratcheted down over time, the theory goes, these credits increase in value making emission-abating investing more lucrative for the sellers and more of a necessity for would be buyers.  Of course the real boon will be in the carbon credit-as-commodity market where, for those players, supply & demand has its own incestuous relationship divorced from the real energy requirements of society.

Salivating banks already have active carbon trading desks that wheel and deal in the E.U.’s cap-and-trade instruments and voluntary markets here.  Derivative dealing—futures contracts, indexing schemes, etc.—cannot be far behind says a study by The Nicholas Institute for Environmental Policy Solutions (Duke U.) predicting that the derivatives trade will probably exceed the market for the allowances themselves. And from Robert Shapiro, former undersecretary of commerce in the Clinton administration and a cofounder of the US Climate Task Force: "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."  I take it that Mr. Shapiro’s mood was one of trepidation, not glee.

These are just the legal shenanigans; there is black trade too to worry about.  The E.U. is already plagued by whirling carousel frauds within its Energy Trading System.  By last May and early June, Europol investigators say, up to 90 percent of the carbon trade in some European countries was totally bogus.

And I haven’t even mentioned carbon “offsets” (vs. credits), 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. Quantifying the value of paying Ugandan villagers to not cut down trees, for instance, or Sri Lankan farmers to trap methane from cow manure in tradable paper, should raise the testosterone levels of any first year MBA candidate.

My fundamental queasiness is that Cap & Trade is a bean-counter “solution.” It’s akin to saying in 1960, “we’ll get to the moon by selling crater naming rights (and creating a taxable resale market).”  We need a hard technology plan requiring some fundamental goals.  What is the end-use energy form for the 22nd century?  Electricity, I guess—for transportation public & private, for heating, manufacturing & communications.  We need to design & develop efficient end-use hardware and the means of electrical production—possibly highly diverse—from non-carbon sources.  We need to revamp the distribution network from a tree-like structure (power plant trunks and leafy consumers at the twigs) to one which can handle a varied and more widely scattered generation mix (more like a scaffold, or Beijing’s “Bird Cage” arena).

We need a manufacturing infrastructure, we need scientists & engineers, not simply another “financial instrument” market and a boat load of energy day-traders.  We do need financial incentives—a dose of altruism & patriotism would help too—and certainly a supporting system of technical education.   Finally, we need a political will which can engage in programs that likely will not bear fruit for perhaps dozens of election cycles.

There’s this BBC radio show (I forget its name) in the vein of Colbert & The Daily Show on which a recent episode devoted a feature to a proposed “Shag & Trade” plan.  If you wanted to have an extramarital affair you could pay someone else to be faithful to their spouse.  Long term affair contracts could be repackaged into a series of weekend-faithful contracts sold separately.  Makes you think—well, smirk anyway.

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