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Memo to America: Don't do carbon trading!

By Roger Helmer
web posted December 13, 2010

Senator Harry Reid has repeatedly denounced opposition to carbon trading as "dangerous." Senator Reid is wrong.  It is the House and Senate climate and renewable energy bills that are dangerous.  Fortunately, the recent elections and the ongoing dissension at the Cancun climate summit could bode ill for carbon trading, any successor to Kyoto – and renewable energy standards.

Carbon trading is wrong on so many levels.  First, there is a growing realization that the small changes we are seeing in Earth's climate are entirely consistent with well-established, long-term natural climate cycles, and that CO2 (a minor trace gas in the atmosphere) has a trivial effect on climate.

Second, many studies have shown that plans to slash fossil fuel use, even if fully implemented, would have a trivial impact on the trajectory of climate – perhaps a tenth of a degree by 2100. And that assumes carbon dioxide really is the driving force in climate change. If it's not, we get zero benefits, at a huge, economically devastating, wealth-redistributing price tag.

Third, most of the authoritative economic studies on carbon trading demonstrate clearly that its costs always greatly exceed any conceivable benefits. As far as I know, the UK's Stern Review is the only major study that concludes "the cost of inaction exceeds the cost of mitigation" – and Stern has been comprehensively and authoritatively refuted. The recent collapse of the Chicago Climate Exchange further underscores the corruption, futility and would-be profiteering inherent in all carbon trading schemes.

A number of commentators, including notably former UK Finance Minister Lord Nigel Lawson, have argued that if any action is called for in the face of climate changes, adaptation is the best and most proper precautionary approach – as and when the need emerges. It is also far cheaper than mitigation, avoids massive up-front costs to deal with a highly speculative problem, and improves our ability to respond to the natural climate changes and extreme weather events that have always battered human civilization.

If we want to reduce emissions (and the case for doing so is increasingly doubtful), then trading in carbon dioxide molecules is simply a bad way to do it. Those who are still tempted by the Siren call of carbon trading should look at the EU's Emissions Trading System (ETS).

The ETS has clearly failed to reduce emissions. Indeed, the ongoing recession has done a much better job.  However, as studies by the London think-tank Open Europe and other respected analysts have documented, the ETS has created massive unintended consequences and perverse incentives that have imposed great costs on European economies, consumers, taxpayers and employers.

ETS/ carbon trading also depends enormously on initial conditions, which are set by bureaucrats, and it creates a huge lobbying industry, as businesses seek to influence the conditions to enhance their competitive advantage. Consider these fundamental questions.

Who measures the emissions?  What is the cut-off point for the minimum emissions that trigger mandatory trading for emission credits?  What grandfather rights do we offer to existing emitters?

Imagine two similar companies. One is just above the arbitrary threshold, one just below. The smaller emitter has a massive competitive advantage, as it does not have to retrofit its facilities or operations, to reduce carbon emissions, nor must it pay for emission offsets.

Or take two similar companies. One has completed a major energy efficiency program; the other has not.  Under grandfathering, the efficient company is penalized for its good deed, while the less efficient is rewarded for having done nothing. Grandfathering also sets up barriers to entry into an industry, and penalizes entrepreneurship and innovation.

In the EU, this was exacerbated by different initial allocations in different member countries. The UK, seeking to abide by the spirit of ETS rules, as chivalrous knights might do, set unrealistically low initial allocations for its industries. France and Germany were more realistic, and thus more generous.

As a result, British companies that had insufficient permits were forced for several years to pay some
$775 million (£500 million) a year to continental companies, which had plenty to spare, and sell. Carbon
prices were both volatile and, frequently, too low to create the desired incentives for every company to "do the right thing" and cut emissions. US states could easily end up in a similarly untenable position.

As a conservative, I hate new taxes. However, a carbon tax (ideally off-set against other taxes, to make it revenue-neutral) would be more efficient, more inclusive, and more predictable than carbon trading. A tax would also avoid perverse incentives and barriers to innovation.

But of course, a carbon tax would also be political poison to legislators, who want to hide any new tax and foist the blame off onto the bureaucrats, Wall Street traders and power companies who would run carbon trading.

Just as bad, the UN's Clean Development Mechanism (CDM) effectively extends carbon trading to international spheres. Russia signed up for Kyoto not because its climate-skeptical political and scientific establishments wanted to cut emissions. They didn't. Rather, knowing the inevitable restructuring of Russia's industry would itself slash emissions, the Politburo saw an opportunity to make billions, by demanding plentiful carbon credits, and then selling the excess to gullible Westerners.

Finally, recent studies show that the European Union, through the CDM, is subsidising Chinese and Indian companies that compete directly with EU companies for wind turbines and solar panels. At the same time, they are creating perversely ironic incentives for EU industries to move elsewhere, and for international investors to avoid Europe. And in the UK, energy and consumer groups say one-fifth of all British households will be in "fuel poverty" this winter (spending more than 10% of their monthly incomes to heat their homes), and more than 28,000 people (most of them elderly) could die of hypothermia for the third year in a row.

Recent news stories show that this is already happening in the United States. It would only get far worse under carbon trading.

We Europeans must be mad.  The question is, will America be insane enough to follow our example? ESR

Roger Helmer, a Member of the European Parliament from the East Midlands Region of Britain, has been actively involved in the economic and scientific aspects of energy and climate issues for many years.

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