Expert explains “Cap n’ Trade Flim Flam Scheme” to dummies.

Market can stem global warming - Isaac Wohl

Climate change looks like a high-stakes lottery, and so far we haven’t been making very smart bets. The worst-case scenarios — rapid, catastrophic, irreversible, species-annihilating, sea level-raising events — should focus our attention and prompt some conservative choices.

In November, the UN’s Intergovernmental Panel on Climate Change concluded that global warming is happening much faster than we thought.

“What we do in the next two to three years will determine our future,” said IPCC chairman Rajendra Pachauri.

This urgency has created some momentum. Last month, within hours of being sworn in as Australia’s Prime Minister, Kevin Rudd ratified the Kyoto Protocol. Al Gore made headlines with his call-to-action speech as he accepted the Nobel Prize. And in Bali, Indonesia, representatives from more than 180 countries just finished drawing a timetable for a new international climate change agreement.

And the United States? Currently, our best chance for a national breakthrough is the Lieberman-Warner bill, which recently emerged from the Senate environment committee. The bill would regulate domestic greenhouse gas emissions through a cap-and-trade system, creating a market for something that doesn’t exist: the absence of pollution.

What will this look like? Under a cap-and-trade system, we’ll decide the total amount of greenhouse gases we’ll tolerate from key industrial sectors. We’ll print exactly enough allowances to cover this amount of emissions. Then we’ll allocate the allowances to firms, who will buy and sell them with each other. When someone sells an allowance, he’s selling a promise that he didn’t release one ton of emissions — giving the buyer permission to release that ton.

Why is this a good idea? A well-designed allowance market will be the cheapest way to reduce emissions, by making sure the easiest cuts are made first. If a coal-fired power plant can cut a few tons of emissions by installing cheap scrubbers, but a paper mill down the road can’t get cleaner without expensive upgrades, the plant can sell its extra allowances to the mill. As far as the earth is concerned, it doesn’t matter where or by whom greenhouse gases are released, so we’ll get the most environmental bang for our buck by curbing emissions wherever it’s cheapest. A strong allowance market will put the right amount of pressure on the right people, making firms compete to stop polluting.

The 2005 European Union Emission Trading Scheme has just finished its first trading period. They’ve had high compliance rates and millions of transactions per month. The price of allowances collapsed due to oversupply, but something similar happened in the 1990s when the United States set up an eventually successful trading system to curtail acid rain. It takes a little while to work the bugs out.

Nine Northeastern states will create a regional emissions trading system in 2009, and California has laid the groundwork for its own statewide cap-and-trade program. Trading systems are running or scheduled to launch in Australia, Norway, Switzerland, Canada and Japan — adding up to a patchwork of little markets around the world.

Which brings us back to Bali. The international community has set a timeframe for negotiating a post-2012 sequel to the Kyoto Protocol. “Kyoto II” really needs to sew all the different regional trading systems into an international emissions market. A global market would be deeper and more liquid than any regional system. It would save money by exploiting the total geographic flexibility of emissions — reducing them wherever on earth it’s cheapest to do so. And it would make it easier for developing countries to get on board. They’ll be able to invest in clean technology and conserve their forests, and then sell their absence of pollution to rich countries.

This means we need to get our national system right. Allowances are like paper currency: we can print as many as we want, but the more we print, the less each one is worth. If the United States is too lax in setting an emissions target, no one will want to accept the flood of our cheap allowances. If we give our allowances away where other countries auction them, it will be a massive, unfair subsidy for American companies. And if we insist on a “safety valve” — a promise that at a certain point our government will print more allowances to keep the price down — we’d be forcing that safety valve on anyone who traded with us. Some of these issues are deal-breakers for our potential partners.

These points sound technical, but really they’re political. We need to decide as a country what kind of trade-offs we’re willing to make to address climate change. Right now we’re choosing inaction, but we have a chance to make a better choice in the months ahead. And we need to cooperate and build points of consensus with other countries, so we can make this decision as a planet. This will require the United States to show the kind of international leadership on climate change we’ve been tragically, self-defeatingly lacking.

A lot of people have worked for years to raise environmental awareness in the United States — to help us think of ourselves as part of a global community, and as a species. Now is the time for our elected leaders to get the message, to believe in the power of American integrity and innovation, and to have the “vision-thing” as they walk on the international stage. What kind of world will we bequeath to our children? Our actions on climate change will be a big part of our answer.

Wohl, originally of Charleston, is an international trade analyst with the U.S. International Trade Commission. He researched international carbon markets for the Pew Center on Climate Change in 2006-07 as a graduate student at Harvard University’s Kennedy School of Government.

http://www.sundaygazettemail.com/section/Opinion/Op-Ed+Commentaries/200712296

There now, all you dummies should now know how that "Cap n' Trade Scheme" is gonna work.

But just how are the State(s) and Federal Governmemt gonna make any money outta the "deal"?

Any expenditures by businesses or corporations are all "expense write-offs" on taxable earnings.