cap-OR-JAIL NOT cap-AND-TRADE!   Alternate title: Pollution is the new gold.

(2010 Jun blog post)

A few more web links may be added to provide additional info on the cap issue.

Introduction : All the talk about 'cap-and-trade' in relation to an energy bill in 2010 points out that 'cap-and-trade' is the centerpiece of such a bill. If this is going to be the guts of our energy bill, then God help Mother Earth. Cap-and-trade is just a way to commoditize pollution. It establishes a trade in greenhouse gas emissions (say, in tons of carbon dioxide, carbon monoxide, nitrogen oxides, sulfur oxides, oxygen oxide [ozone]). Cap-and-trade allows the major sources of pollution (like coal burning entities --- companies, manufacturers, government agencies, universities) to keep on polluting unabated by allowing them to buy pollution credits from other sources of pollution (like natural gas burners --- or simply entities who have been given some pollution credits that they are not going to use.) NOTE: If there is a liberal amount of pollution credits 'dumped' into the market (either to start with or as time goes on), then there is going to be no real cap in place. Cap-and-trade will just be a lot of trading with no capping. Hence I write it as cap-AND-TRADE --- emphasis on the TRADE. If I could use a smaller font for the 'cap' part, I would.

The vultures are circling : The Republicans are salivating over the prospect of a cap-AND-TRADE system. Witness Senator Corker (R-TN) at the Senate hearing ( 2009 Jan 28 ? ) at which Gore pointed out that China has a cap-or-imprison policy, NOT a cap-and-trade policy. Corker was obviously eager for the trade part of cap-AND-TRADE to start. He was clearly less interested in the cap part. It was from Gore's comment that I got the idea for the slogan cap-OR-JAIL ... NOT cap-AND-TRADE! I plan to have this phrase put on t-shirts that I will wear frequently. (Link to my Environment t-shirts page goes here.) There are people in the financial industry who are going ga-ga over the prospect of having a new way to get commissions on trading --- in this case, commissions and fees on trading in pollution. Heaven knows that there are low-lifes in the financial industry who were dislodged from their comfortable scams by the mortgage 'melt-down' and who were now looking for a new outlet for their 'innovations'. People (and I use the term loosely) such as 'street-corner' generators of sub-prime mortgages, where the mortgages were based on getting people sign mortgage agreements after convincing the prey that the prey could handle variable-rate mortgages with no down payment --- even though the eventual payments would probably consume more than 40% of their gross (not net) income. [More like over 60% of their net income.] (Their ads: "Bad credit? Bankruptcy? No problem. We'll give you a mortgage with no down payment.") The CNBC program called 'House of Cards', that CNBC showed repeatedly in 2009 and 2010, pointed out many cases of former physical trainers --- and all sorts of people untrained in the financial industry --- who were able to open 'street-corner' mortgage companies. In these mortgage 'chop-shops', the typical mode-of-operation was to tell their prey to leave blank the part of the form that asked for their current income. The mortgage broker offered to fill that in. You can guess what they did. They manufactured income figures nowhere near the real income of the borrower. NOTE: This was happening on Main Street. Main street was in cahoots with Wall Street. And it wasn't just the mortgage generators. They were aided, on Main Street, by the local appraisers who were rewarded for generating inflated appraisals on properties involved in these mortgages. Main Street is just as much to blame as Wall Street. To continue: Then there were/are the packagers of the mortgages for sale in 'bundles'. These people may be on either Main Street or Wall Street. Then there were/are the 'high-rent' firms on Wall Street who were creating even bigger packages of mortgages --- which were loaded down with 80% or more crappy ('sub-prime') mortgages. These 'high-rent' firms were being really 'innovative' by carefully planning to indulge in 'short' trades on these 'instruments' after unloading them on some unsuspecting 'patsy'. They would gain in the intial sale and then gain even more in the subsequent short trading. The most notorious example of this was certain people in Goldman Sachs --- who created these packages and managed to unload a lot of them on one of their fellow Wall Street firms --- Lehman Brothers. Goldman Sachs has probably more to do with the failure of Lehman Brothers than any other entity. Anyway, the point here is that there are plenty of people in the financial industry who are somewhat under-employed at the moment who are eager to jump into this new market of trading in pollution. There will not be much capping going on in this environment --- just lots of trading --- in things that should be considered junk (carbon dioxide, etc.), but that are going to be transformed into gold, so to speak, by this cap-AND-TRADE system. A modest proposal : When I say cap-OR-JAIL, NOT cap-AND-TRADE! I mean jail for the CEO (the head of the pollution generation entity) --- not for some middle manager or for some flunky. It will take at least a few months in jail to make these CEO's take capping of pollution seriously. I trust it would take just one or two high-profile cases to convince the pollution generators that it is time to bite the bullet and start reducing their pollution generation as much as current technology allows --- and, henceforth, to help the technology along to generate even more reductions in pollution.

Back to reality : Of course, I realize that the actual passage of laws to jail CEO's for violation of pollution caps is not likely to ever really come about. But one of the great motivators in life (and especially in business) is money --- for example, in the form of tax credits. So, while an energy bill based on cap-OR-JAIL may be unrealistic, an energy bill based on CAP-or-LOSE-TAX-CREDITS might be palatable. Note that such a motivational structure has certain socio-economic benefits. Namely : Those who cap their pollution aggressively are rewarded for not putting a pollution burden on the general populace --- a burden which would probably have to be dealt with by government programs. Example: The super-fund cleanup sites which have been a negative drain on the government economy stretching over decades. On the other hand, those who are lax in their pollution abatement efforts would lose out on the tax credits --- and the government could use the resulting tax-flow to deal with their pollution effects. Of course, in structuring a properly motivating structure for the 'cap system', the 'devil [as always] will be in the details'. One of the bigger challenges in this endeavor at proposing a legislative structure is answering the questions: How do we measure 'aggressive' pollution reduction? Some ratio of pounds of pollution to BTU's of energy produced? (Perhaps multiple ratios corresponding to the different pollutants --- carbon-oxides, nitrogen-oxides, sulfur-oxides.) How do we apply a reward structure to the measurement(s) we come up with? If I ever have some thoughts on such a motivating structure (more light than heat), I will add that here --- along with suitable web links. For now, I am blogged-out. But here is a quick, cursory stab at that subject. There was reported agreeable talk of a straight carbon tax between Corker and Gore in the Senate hearing referred to above. I prefer that 'solution' to cap-AND-TRADE. But I think that there are better ways to reduce such pollution (carbon-oxide emissions). I don't remember seeing Corker talk much on a carbon tax in that hearing. But I DO remember how he seemed to be almost unable to contain his excitement over the prospect of establishing a market in trading pollution as if it is gold. One problem with such a tax (other than that no Republican, even Corker, would vote for it) is that it is all stick and no carrot. I favor using carrots to sticks --- and tailoring the motivation to achieving desirable behaviors.

Prediction: Around the year 2020, the U.S. dollar will be replaced by pollution as the standard of exchange.

Historical perspective: From the gold standard to the pollution standard in about 100 years.

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