The Genie Called Cap and Trade
The Global Warming situation has opened the door to the greatest change since the Industrial Revolution. Everything in the world of commerce and economics is going to change very quickly and our children will live in a very different world. We are going to see a rebirth of scientific discovery and invention on a monumental scale and carbon markets will be created that will make many people, companies and countries very rich.
In an effort to get a handle on global carbon emissions many ideas are going to surface. By now we have all heard of Cap and Trade, an idea that was launched to deal with CO2 output and how to manage needed reductions. This has brought about the creation of huge carbon trading markets. The big reason the trading markets are being created is because they can. At least for the foreseeable future we are going to emit massive amounts of carbon waste and someone is creating a market for a commodity that can easily be traded for profit.
Most people believe that the cap part is a good and timely idea. The amount of carbon output worldwide needs to be lowered so a mandatory cap that is periodically lowered would be a great vehicle to facilitate lower emissions. However, the ability of governments to lower a cap and force companies to spend capital to become more efficient feels a bit like a credit cards ability to raise interest rates on their customers.
Even though many companies are voluntarily lowering their output through improved energy efficiencies, governments at all levels are designing caps to legislate into law. Canada is in the midst of a policy change that would send proceeds from carbon credits to a fund that the government controls effectively creating a carbon tax. This mandatory income into the government coffers may look good to a state or country that needs to build its tax base. So even though we think caps are a good thing they hit us right in the wallet. Companies need to pay for the credits or offsets required to meet the caps with funds from somewhere and they have a bank to draw from called their customers.
This will all continue to shift and change as markets are developed and carbon prices fluctuate. In order to have carbon to trade the markets will have to pressure governments to regulate their reduction limits to create a supply while at the same time regulating to create a demand. The markets will lead the governments by the nose. If the government tries to rebel and strike to massively lower emissions it will upset the supply and demand balance. It would be like the governments requiring all cars that get less than 50 mpg to cease operation; the price of gas would skyrocket do to the lower demand because the oil companies, who have no competition, would need to make up for the loss in sales with higher prices.
Consider the scenario where huge carbon centered commodity markets are created throughout the world, trading billions of Dollars a day, until one day when the global community finally reaches the goal of an emissions free world. In this scenario the markets would crash do to a lack of carbon to trade. Do you think the markets would let that happen? Once a market is created for cigarettes, I mean carbon; do you think there will ever not be a market? As long as there are more than 6 billion people in the world exhaling and cutting down trees, there will be excess carbon to cap and trade.
So before these systems take a firm grip on our economy we need to find a way to join in on the profits or find other ways to deal with our CO2 output. We need to figure out how to lower emissions without creating a genie that we can not put back in the bottle.
