Thursday, July 9, 2009

Too Stupid to Live

It's not an official DRG, just an unofficial ER diagnosis - Too Stupid To Live. You wouldn't believe what some people do. Two of my favorites - looking into a homemade gun to see why it didn't fire (it did), and getting into a firepit to add gasoline to the fire. But individual carelessness is not my point.

Faced with the ongoing warming of our planet, or "Hell AND Highwater", our Congress is moved to action. What do they choose to do? Why, bail out the financial sector by creating a new form of speculation - profitting on the demise of our ecosystem, or cap and trade.

Passed by the Democrats in Congress, except for Dennis Kucinich, who voted against it out of concern for our planet, and my congressman, who voted against it because it didn't give enough to the coal companies (!), it is being stalled by the Republicans in the Senate, who call it a tax increase. No, it's a giveaway to polluters, so I'm sure that after posturing for their home mouth-breathing constituents, they will vote for it.

James Hansen, the NASA scientist who is increasingly concerned about the lack of action to save our atmosphere wrote a letter in which he calls the program . 8 2. Some permit traders will become millionaires by speculating on carbon prices – this money does not come out of thin air – it comes out of consumer pockets. 3. An effective cap will eventually cause a high implicit tax rate. As Nordhaus (see below) notes, volatility of this tax may become “extremely unpopular with market participants.” Such problems would cause repeated changes, or abandonment, of a global cap-and-trade system. If that system attains only limited coverage, as is now the case, worse problems will arise in the global offset markets. For these reasons, and because they believe a cap-and-trade approach will continue to stymie international negotiations, many of the top American economists from across the political spectrum vigorously oppose cap and trade. Notable among these are William D. Nordhaus, Joseph E. Stiglitz (Making Globalization Work, Chp. 6), and N. Gregory Mankiw. On Permit Price Volatility. You say, [Emission permits] “will generally provide greater security and improved risk management for firms and market participants than a tax or administratively set prices.” Actually, volatile permit prices are almost universally considered to be an unavoidable deficiency of cap and trade relative to a carbon tax. Nordhaus, in A Question of Balance (2008), examines the volatility of SO2 permit prices in the United States under the SO2 cap and trade program and finds they have been twice as volatile as the S&P 500 index and nearly as volatile as oil prices. He then concludes (p. 155): Such rapid fluctuations are costly and undesirable, particularly for an input such as carbon whose aggregate costs might be as great as those of petroleum in the coming decades. An interesting analogue occurred in the United States during the monetarist experiment of 1979-1982, when the Federal Reserve targeted quantities (monetary aggregates) rather than prices (interest rates). During that period, interest rates were extremely volatile. In part because of this increased volatility, the Fed changed back to a price-type approach after a short period of experimentation. This experience suggests that a regime of strict quantity limits might have major disruptive effects on energy markets and on investment planning, as well as on distribution of income across countries, inflation rates, energy prices, and import and export values. Quantity limits might consequently become extremely unpopular with market participants and economic policy makers. [emphasis added] We now have data on EAU futures that were unavailable to Nordhaus when he made his study of volatility. Using futures with settlement date December 2012, which now have a four year time series, we find they are 2.9 times as volatile as the S&P 500 from the opening of the EU market on 22 April 2005 until 27 April 2009. On Price Discovery. The hope that futures and options markets will “reveal” future carbon prices under a cap and trade system is a case of whistling past the graveyard – with the gravestones bearing names like “securitization,” “derivatives,” and “credit-default swaps” that have brought the global economy to the brink of ruin. It would be less than prudent to give license to institutions in Australia and elsewhere to construct new, potentially toxic financial instruments, particularly ones that will help decide the fate of essential investment in zero- and 9 low-carbon technologies. 8 I also have to question the capacity of millions of Australian households and small-business owners to employ price discovery to guide their decisions to purchase low-carbon cars and houses and to move generally to climate-sustainable lifestyles. Why not just give them the future carbon price straight-up? On Progressively Rising Tax Rates. You note that you are “unaware of instances where countries have committed to, and delivered, a program of progressively rising tax rates.” Yet pollution taxes have rarely been tried under the traditional mindset favoring command-and- control regulations. Nevertheless, two examples of progressively rising pollution taxes come to mind: the tax on chlorofluorocarbons and other ozone-destroying chemicals implemented by the United States beginning on Jan. 1, 1990 to support the Montreal Protocol 9 ; and the carbon tax that took effect in British Columbia, Canada’s third largest province and roughly the same population as your state of Victoria, last July 1. 10 Your concern that “a price-based approach [such as a carbon tax] may not be capable of achieving the political mandate required to deliver the ambitious emissions reductions called for by the science, over the long run,” surely depends upon whether 100% of the carbon fee is returned to the public. Certainly, the nation should and will have the option of deciding whether the carbon fee will continue and how fast it will rise. My guess is that, as they see the benefits and consequences, and as many receive more in dividends than they pay in increased fossil energy cost, they will encourage continuation of this simple, honest, transparent system. In contrast, when cap-and-trade problems associated with “securitization,” “derivatives,” “credit-default swaps”, and speculator millionaires arrive, there is likelihood of public outrage and demise of support for emissions reduction. On implementation. The carbon tax in British Columbia took only months from announcement, in February 2008, to implementation, in June 2008. Cap and trade schemes have taken an order of magnitude longer to craft and introduce. 11 The difference arises from the complexity of cap and trade vs. the simplicity of a carbon tax or fee. It is this contrast that helps account for the shift in opinion that has become palpable in the U.S. business community, the political commentariat and, now, in the U.S. Congress. 8 I commend the recent (March 2009) report by Friends of the Earth, USA, Subprime Carbon? Re-thinking the World’s Largest New Derivatives Market,, for clearly and soberly “connecting the dots” between carbon emission permit trading and carbon derivatives. 9 According to a retrospective analysis by the Arthur D. Little consulting firm for the Alliance for Responsible Atmospheric Policy, the tax on CFC’s began in 1990 at $3.00/ODP-kg (ODP denotes ozone-depletion units) and automatically increased each year by $1.00/ODP-kg, finally reaching $18.80/ODP-kg in 2002. See 10 The British Columbia carbon tax began at $10 per metric ton of carbon dioxide on 1 July 2008 and is scheduled to increase annually by $5/tonne, reaching $30/tonne on 1 July 2012. 11 A case in point: “RGGI,” the most ambitious cap and trade scheme in the U.S., the northeast states’ Regional Greenhouse Gas Initiative, was announced in 2003 and started in 2008. It is minimalist and covers only electricity. Its allowances have been trading at a pathetically low value of about $3 per tonne. 10 The dividend, which you presumably would choose to give to all adult legal residents, can be implemented just as quickly, delivered electronically to bank accounts every month. It could be added to debit cards of anybody who does not have a bank account. In closing, I note the recent comment of New York Times columnist Thomas L. Friedman: [S]simplicity matters. Americans will be willing to pay a tax for their children to be less threatened, breathe cleaner air and live in a more sustainable world with a stronger America. They are much less likely to support a firm in London trading offsets from an electric bill in Boston with a derivatives firm in New York in order to help fund an aluminum smelter in Beijing, which is what cap-and-trade is all about. People won’t support what they can’t explain. 12 I believe Friedman is right about Americans and that the same applies to Australians. People are hungry not just for a sustainable climate, and cleaner air and water, but for political openness and honesty. They want their leaders to level with them. I hope that you will provide leadership, and encourage other nations, toward a path that can achieve these ends. Thank you for your openness to my information and point of view. I look forward to your reply. Sincerely, James E. Hansen 12 Thomas L. Friedman, “Show Me the Ball,” The New York Times,">The Temple of Doom.

Our economic system is artificial, man-made, isn't working for the good of all and can be changed.

Our environmental system is natural, supports an astounding variety of life, and needs to be preserved.

So what do our so-called leaders do? Subsidize the financial system at the expense of the natural world. Just like the so-called environmentalist Al Gore did in the 90s.

Maybe we're just too stupid to live.

1 comment:

ryk said...

I find little comfort in knowing that even after we render many species (including ourselves) extinct, the natural system will continue without us.