The Cap and Trade Endgame

Yesterday I wrote about the failure inherit in the idea of carbon taxes. What about carbon rationing, more commonly referred to as cap and trade? If there is a hard set limit to the amount of carbon that can be outputted by an individual or company won’t that solve the problem? Won’t the issue of carbon being emitted into the atmosphere be a thing of the past (also, why to progressive environmentalists spend all of their time focusing on a compound necessary for plant life, I can think of far more dangerous compounds to be concerned about)?

While progressive environmentalists love to parrot political solutions to environmental problems they fail to see the fact that political solutions are never actually solutions, they’re merely mechanisms of plunder. How can a system of hard set limites be used as a mechanism of plunder? Through the punishment wielded against those who surpass their ration. All political solutions have a common problem, enforcement (which isn’t the only problem mind you). Who is going to enforce a carbon ration? Either a currently existing agency or a newly formed agency. My money would be put on the Environmental Plunder Protection Agency (EPA) being given the task of enforcing a carbon rationing scheme in the United States although legislation could create a new Carbon Enforcement Agency. Either way the same point of corruptibility will exist, the desire to plunder.

Government agencies are the same as individuals and businesses in one respect, they want more wealth. Unlike individuals and businesses, government agencies are only able to get more wealth through expropriation. One form of expropriation is taxation, another is through fines. Let’s look at a piece of existing legislation that affects the same realm as a proposed carbon rationing scheme does, the Clean Air Act [PDF]. What happens when an individual or business violates the Clean Air Act? They’re fined:

Section 113 of the Clean Air Act allows EPA to seek penalties of up to $25,000 per day for each violation. EPA may in appropriate cases accept less than the statutory maximum in settlement.

The maximum amount a violator can be fined is $25,000 per infraction per day but the EPA maintains the ability to issue lesser fines. There is an entire section of the document that deals with “calculating a penalty.” Reading through it various criteria exist for determining the penalty issued against a violator including the perceived economic benefit gained by the violator, the gravity of the violation, and the potential for harm. What interesting is that the supposed economic benefit is based on a computer model while the other criteria are determined by enforcement agents. Giving enforcement agents the right to determine the severity of a violation and set a fine according to that set severity opens the doors for cronyism.

Of course we would need a motive for an individual or business to violate a carbon rationing law. For the motivation we need to only look at basic economics, namely supply and demand. Creating a carbon rationing system would create a supply of carbon ration units (CRU) which would be in demand by any entity that emitted carbon. So long as demand remains the same prices have a tendency to increase as supply decreases. Likewise, so long as supply remains the same, prices have a tendency to increase as demand increases. In the case of a carbon rationing system the supply of CRUs would likely remain constant or decrease over time (as the law is trying to discourage emitting carbon into the atmosphere) while the demand would increase (as the demand for electrify and consumer goods increases). Therefore it would make sense that the cost of CRUs would continue to increase with time. Therefore CRUs would become a valuable good (although a fiat one) that holders would have cause to sell while emitters of carbon would have cause to buy.

A third factory of this grand scheme that needs to be looked at is the way CRUs would be distributed. Two methods would likely exist: either those wanting to emit carbon would have to buy CRUs from some government agency or some government agency would grant CRUs based on some kind of formula. Either scheme is likely to favor larger polluters. Let’s consider the first method, companies had to purchase CRUs from a government agency. As stated above, as demand for CRUs increased or supply decreased (or both) the price of CRUs would increase. An increasing price would favor established individuals and businesses that had access to enough excess capital to soak up the additional costs of purchasing CRUs to continue with business as usual. Meanwhile a new barrier to entry has been placed on markets that involved emitting carbon into the atmosphere, the cost of purchasing enough CRUs. Now on top of having a place of business, a method of manufacturing goods, a method of getting those goods into the hands of consumers, the cost of complying with current regulations, etc. a new market actor also has to purchase CRUs. Effectively the established market actors are further shielded from new competition because the bar to enter the market has been raised. If the prices of CRUs continued to increase the bar would be in a constant state if rise, further shielding currently established market actors from potential competitors.

Now I’ll consider the other method of distributing CRUs, a government agency doling them out. The information about the Clean Air Act I linked to earlier demonstrates the problem with allowing government agencies to determine things, they get to determine the criteria their determinations are based upon. A government agency in charge of distributing CRUs would have a plethora of criteria to use including economic need (for example, power plants are necessary for modern life so it would make sense to give power plant holders enough CRUs), economic benefit (a large company can be said to provide more economic benefit since they serve more customers), necessity for the security of the nation (obviously defense contractors would need to be given enough CRUs since they build the weapons that allow the state to plunder foreign countries protect our nation from the terrorists), etc. Such a system would be ripe for cronyism. In fact it would be very possible, and I would even say very likely, that new market actors would not receive enough CRUs to manufacture enough goods to turn a profit. Due to this they would likely be forced to sell their CRUs to already established market actors in order to simply keep the doors open. Since they would be unable to manufacture goods they would be unable to compete with established market actors and the established market actors are once again protected from possible competition by the state. Regardless of the method chosen to distribute CRUs established market actors would have a major advantage over new market actors.

So we have three factors to consider: the mechanism of punishing violators of a carbon rationing scheme, the motivation a business would have to violate a carbon rationing scheme, and the method in which CRUs would be distributed. All of this combines into a nasty system that favors currently established market actors and hinders new market actors.

Going by historical examples it would be likely that violators of a carbon rationing scheme would be fined and the amount of that fine, although capped at a maximum, would be determined by an enforcement agency. The law of supply and demand would likely cause the price of CRUs to increase over time. At some point the price of CRUs is likely to exceed the common, or even maximum, find of violating the carbon rationing scheme. There is when it will be in the best interests of carbon emitters to violate the rationing scheme. In fact such a scenario wouldn’t be dissimilar to one where British Petroleum (BP) was able to buy permission from an environmental enforcement agency to dump more mercury into the Great Lakes. The state doesn’t care if it gets its money through fines or selling permission, and neither do businesses that are able to soak up the additional costs. Unfortunately for new market actors they are unlikely to have the additional capital to pay the fines that would almost certainly be involved in violating the rationing scheme.

Of course the state could just keep increasing the fine, right? Technically yes, although they would be shooting themselves in the foot by doing so. The state exists through theft and is unable to continue existing if they run out of victims to steal from. What motivation would the state have for increasing fines to a point violators couldn’t pay? Doing that would ensure the end of continued payments, effectively it would kill the cash cow. The state, like a tick, only takes what it can get away with without killing its host. A tick that bled a host dry would find itself having to go through the trouble of finding a new host and eventually would fact the harsh reality of having no hosts left to suck blood from. The state is the same way, they don’t want to bleed their cash cows dry, they want to bleed them as much as possible without killing them so they can continue the parasitic process. It’s unfortunate for new market actors that they don’t have enough excess capital for the state to take otherwise they could get in on the scheme.

A carbon cap, like a carbon tax, is a mechanism of plunder. It won’t accomplish the goal of lowering carbon output because the state won’t create a system that will kill its cash cows. All a carbon cap will accomplish is rewarding the state and its cronies at the cost of everybody else. No new competitors will be able to enter the market meaning currently established market actors will be free to increase their prices (don’t forget that any additional costs, such as needing to buy CRUs, will be forwarded onto customers) without concern. Overall quality of life will be reduced as individuals are unable to afford many of the goods and services they normally would if competition forced a lowering of prices (like many state policies this one affects the poor the most). On top of that we probably won’t have any reduction in carbon emissions anyways so the whole point of the system would go unfulfilled.

By demanding a “cap and trade” system progressive environmentalists have once again allowed themselves to be suckered into helping the very people they oppose (namely large polluters).