“Cap & trade” too complex. Why not just create more rigorous emissions standards and fine polluters?

Let’s take a break from the presidential election campaign to discuss a topic that both candidates seem to be largely ignoring: the environment – specifically the enormous amount of carbon wastes that human are spewing into the environment by burning fossil fuels. The funny thing is that in long term, the rapid warming of the planet through human action is the most single important issue we face, and the candidates want to run away from the discussion.

California is not taking the head-in-the-sand approach of our national leaders when it comes to pollution emissions.  As the New York Times reported today, California is set to introduce a cap-and-trade plan which charges industries money for the greenhouse gases they produce. The California plan seems to be the preferred mode of economists and governments to address pollution control.  A similar cap-and-trade plan never made it through the U.S. Congress. The European Union has had a cap-and-trade program in place since 2005.

But just what is cap-and-trade? The Times gives a good overview of what will happen in California. After I read it, I was scratching my head at its complexity:

“…the state will set an overall ceiling on those emissions and assign allowable emission amounts for individual polluters. A portion of these so-called allowances will be allocated to utilities, manufacturers and others; the remainder will be auctioned off.

Over time, the number of allowances issued by the state will be reduced, which should force a reduction in emissions.

To obtain the allowances needed to account for their emissions, companies can buy them at auction or on the carbon market. They can secure offset credits, as they are known, either by buying leftover allowances from emitters that have met their targets or by purchasing them from projects that remove carbon dioxide or other greenhouse gases from the atmosphere…”

I like the part of it that involves gradually lowering the amount of emissions that are allowed.

But the idea of trading emissions credits is overly complex and therefore almost by definition easy to abuse.   Cap-and-trade creates a marketplace in which pollution credits are bought and sold.  Theoretically it enables a major polluter to continue to spew poison into the air merely by buying pollution credits from companies that don’t pollute or don’t pollute as much. As with all markets, even the theoretical “free market,” the altar at which most Republicans pray, the cap-and-trade marketplace runs by rules and regulations that lend both additional complexity and the possibility of nefarious manipulation.

In some ways, cap-and-trade reminds me of the securitization of home mortgages. It used to be that banks loaned people money to buy a home and then patiently waited until the consumer paid the loan back. With securitization, the banks made the loan and then sold it to someone else, who lumped together many loans and sold them as an investment that could be traded on the market.  Creating a market for mortgage-based financial instruments was supposed to spread the risk and lead to safer investments, which in turn would help consumers.  We all know how that worked out: Because banks were selling off the loans, their lending standards fell, people who couldn’t afford loans got them, those loans were buried in the financial vehicles that were sold, and when the loans went south, the entire house of cards of the mortgage market crumbled, taking the U.S. economy with it.

I don’t think that cap-and-trade will lead to another financial meltdown (although trading in a triviality—the tulip bulb—took down the Dutch economy in the 17th century). What it does is interject a level of complexity that is both unnecessary and open to abuse.

Cap-and-trade is the type of plan that Rube Goldberg might build.  Rube Goldberg was an American cartoonist who drew a series of popular cartoons depicting complex gadgets performing very simple tasks in convoluted ways.

The simple way to deal with emissions is to set regulations and make polluters follow them or suffer stiff fines. The argument against this approach is that it will be too expensive for companies or that the companies will pass on the costs of consumers, hurting everyone, but especially poor people.

These arguments are bogus: First of all, society is already paying the additional cost of pollution through higher healthcare costs and cleanup of natural disasters. These “hidden” costs, often called “social costs” are paid collectively by all of us. We pay and the company doesn’t, meaning that besides allowing our environment to be fouled, we as a community are subsidizing the income of the polluting company’s senior management and shareholders. It’s a classic “pay me now or pay me later,” except instead of the companies paying now, we all pay later.

Keep in mind, too, that the money that the polluting companies shell out to put scrubbers on coal-burning plants, introduce a little natural gas into the coal mix or any of the other currently available emission technologies goes to the companies that develop, sell and maintain these pollution-preventing technologies . The money is not burned and lost to the economy. It is used to create a more diversified economy, and one that is not so hazardous to the health of the Earth.

As to poor people who might not be able to afford the new higher prices when companies clean up their act, it seems to me that it’s far simpler to give the poor an energy tax credit than to create a convoluted and easy-to-scam cap-and-trade marketplace.

I applaud California for actually doing something about greenhouse gas emissions.  I only wish it had followed the dictum of 14th century Christian philosopher, Thomas of Occam, to seek the simpler solution, which is this case means making polluters pay.