Saturday, December 12, 2009

Can the Free Market Save the Planet?

Can the Free Market Save the Planet ?

This week 192 nations are meeting in Copenhagen, Denmark for a world climate summit. The task is to come to some international agreements for all nations to reduce their CO2 emissions. Failure to do so will raise the temperature around the globe, melt the ice caps at either poles, cause serious droughts over large areas which will bring with them famines due to food shortages. Increased CO2 in the atmosphere is a health hazard producing more children and adults suffering from asthma. The world is facing a series of major problems. Something needs to be done.

It is clear what that is: we need to reduce the amount of a number of gases—CO2 is only one of them--released into the atmosphere. This needs to be done by regulating emissions of factories, refineries, automobiles, airplanes, as well as land fills, stockyards and chicken hatcheries. We need to produce less of these noxious gases by reducing the activities that produce them. That is clear, very simple, but obviously very difficult to do.

Well, you will be happy to hear, that this financial geniuses who bought us the bubble in the 1990s and the sub prime mortgage bubble last year, have now developed a way of making it much easier to reduce pollution and to clean up the environment. It is called “carbon trading” or more popularly “cap and trade.”

It seems like a wonderful project. The government of any given country sets limits to permissible pollution and over the years those limits become lower and lower. In this way pollution will be reduced substantially over a number of years. That is the “cap” part of “cap and trade.” The trading part seems similarly simple. The government gives different industries permits to produce a certain amount of pollution. If a company succeeds in reducing air pollution levels below required levels, they will not use up all their pollution permits and they can then sell those permits to someone else who has trouble meeting the expected limits of pollution. Since companies, so the story goes, make money selling their permits they have an incentive to lower their pollution below required levels. They also have an incentive to invent new, cheaper ways of reducing pollution because that will allow them to sell extra pollution permits and spend less money reducing pollution than their permits are worth. Once again everyone wins.

The trouble with that scheme is that it does not work. It has been tried for a number of years in Europe. There the companies who received free pollution permits from the government made out like bandits; pollution has not gone down but gas and other energy prices have gone up. The European cap and trade scheme turns out to be a boondoggle – good for polluters; bad for everyone else.

We can understand how that happens once we find out how people get pollution permits. In Europe, and also in the US, the government gives away a pollution permits free to certain industries. The government gives polluting industries the right to discharge noxious gases into the air for free. It is as if the government gave away broadcasting frequencies, or mining rights, or significant portions of public lands to private companies who were cronies of the government. The air into which CO2 is discharged belongs to all of us, but the government gives away for nothing the right to foul this air. In Europe, governments furious lobbied by industry, overestimated how many pollution permits should be given away. Industries had more permits than they needed to continue polluting as they had been and still could make extra money selling extra permits. At the same time, they claimed that lowering pollution was expensive--even though they did very little lowering--and passed extra cost on to consumers. The whole process was blatantly corrupt.

According to the Wall Street Journal “According to European Commission figures, emissions from the 27 member [European] states rose by 1.9% in the first three years of the regime. Following criticism, the caps for the period to 2012 were reduced for the majority of member states, but only to a little lower than actual emissions in 2005, and the evidence is that the recession is having a much more direct impact on emissions than the trading scheme (incidentally putting a lot of low-priced permits on the market)..”

There are other ways of getting pollution permits and they too undermine cap and trade. One can obtain pollution permits by what is called an “offset.” Planting trees is one offset because trees absorb CO2. Here is how this works: a company acquires a large tract of forest, bulldozes the trees in order to plant palm trees for palm oil production. The company is not penalized for bulldozing the forest but then applies for a carbon offset for planting palm trees. It can then sell these permits and make some money. But total carbon emissions have not been reduced.

Sometimes pollution is reduced due to declining industrial activity. In the 1990s the Russian economy was in total chaos. Industrial activity declined precipitously and Russia now has a bunch of pollution permits which it can sell. The same is happening in the United States where the current economic crisis has slowed down production and thus has given various companies pollution permits which they could get without cleaning up their industries or doing anything to combat global warming.

In this way pollution permits can be gained easily without doing anything. It cheapens pollution permits and that makes it easy for other companies to avoid cleaning up their production because they can just buy some reasonably cheap pollution permits.

But sometimes cap and trade seems to work. In the US we have had a cap and trade scheme to lower SO2 emissions--the source of acid rain. By all accounts that program has succeeded in lowering overall SO2 emissions from power plants in the US. But this success conceals one of the serious problems of cap and trade programs. They allow plants that lower their emissions more than required to sell some pollution permits to other plants that have difficulties lowering their emissions to required levels. Thus some plants may well increase their emissions as long as countrywide emissions go down.

But by its very nature, cap and trade has no effect to lower emissions of gases that are harmful to the people living near a power plant. SO2 is one of these gases. It causes asthma and other lung diseases to people living near the source of emissions. Since cap and trade only addresses overall levels of emissions it is compatible with increased emissions in some plants, thereby affecting populations living near the power plant. From the point of view of public health, cap and trade is a failure.

Why are governments, including our own, fully supporting cap and trade schemes? For the same reason that most of the bailout money went to save the big financial traders and banks who were behind the current economic crisis, while ordinary Americans who lost their houses and jobs receive very little help. The large financial houses have a hammerlock on the government; they get what they want because they have an army of lobbyists to make sure that they are first at the public trough. Cap and trade is obviously good for traders while, once again, ordinary citizens and future generations do not get what they need. But that is unfortunately not a big surprise. Even the Wall Street Journal, the voice of large business in the US, admits that “When push comes to shove, governments will always protect their national champions. The German government, for example, negotiated an easing of planned caps on emissions from cars to the advantage of manufacturers of higher-powered cars such as Mercedes-Benz and Porsche."