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Posted by on Mar 25, 2008 in Economy | 4 comments

Wall Street Moves To Destroy The Environment

Supposing I were to tell you that financial markets were over-regulated. That the way to ensure endless economic well-being was to lessen the government’s oversight of these markets. That these markets are in fact self-regulating, and that the risk management tools already built into them eliminate the need for growth deadening outside interference.

Hearing this rap today you would immediately think about recent upheavals in world financial markets caused by under-regulation and judge the above arguments quackery.

You would note that regulations of the kind instituted during the New Deal expedited rather than detracted from steady and impressive economic growth for decades. You would also note that the withering away of such regulations since the 1980s, climaxing with the present Bush Administration’s extreme efforts in this realm, brought about the present financial crisis.

Such negative consequences, however, are nothing, utterly nothing, compared to the harm under-regulation could cause when it comes to environmental protection. Economies can recover from mistakes, even very serious mistakes. Natural ecologies, once lost, are lost forever, with potentially devastating impacts on entire civilizations.

With this in mind consider Wall Street’s latest budding cash cow. It’s a market that will trade pollution credits, credits that give companies and other polluting entities who find it inconvenient to meet regulated pollution standards a means to buy emission credits that give them an out from doing so.

The so-called “cap and trade” system to make this possible works like this: Emission caps are set on pollution-emitting entities, the traditional regulation way of controlling these emissions. Polluters who emit less than their assigned caps, however, can trade away these surplus reductions to polluters exceeding their own caps, allowing the latter to meet cap standards in a backhand way. Exceeding polluters can also buy other offsets for their excess emissions from unspoiled natural ecologies such as rainforests, whose owners guarantee they will continue to soak up more pollutants than emission exceeding companies produce over their assigned caps.

What’s the rationale for this convoluted approach to emission reductions? Why is it supposedly better than the straight forward cap on all polluters, which long experience and plain old common sense indicate is the best way to meet the challenge of controlling pollution?

The Wall Street crowd peddling this commish-generating nostrum bill its “counter-intuitive” advantages. They say it is example of “thinking out-of-the-box” when it comes to emission reductions. And the clincher, that it’s “a free market-based solution to pollution.”

The market mechanism that’s supposed to be at work here involves the totally unproved, and indeed, unprovable contention that polluters best able to reduce their own emissions will become even more avid in this regard in order to generate emission trading credits they can then sell in a free market. And that owners of pristine, emission absorbing lands will become better protectors of these properties in order to generate their own saleable emission trading credits.

Move beyond this counter-intuitive, think-outside-the-box, free markets solve everything blather, though, and the real potential of emissions trading becomes apparent.

Polluters don’t invest more to reduce their emissions further so as to create a new asset, a trading credit. Rather, this faux asset comes into being because no polluter getting under its own assigned cap ever does so exactly, anymore than a motorist trying to stay under a 60-mile-per-hour speed limit on a very well policed highway goes exactly, precisely, 60-miles-per-hour. A tradable asset, in other words, would appear without a credit incentive that lets polluters off their own regulatory hook.

The silliness of this heralded market incentive becomes even clearer when one considers how some polluters reduce their emissions in an economic downturn. If an auto company can’t sell its cars and reduces production by 50 percent, closes its plants half the time, it might be able to generate and market twice as many emission credits. A company that shuts down completely might reap an emission trading bonanza. By virtue of going out of business it becomes a zero emitter.

As for saving pollution absorbing wilderness areas by letting polluters buy credits to preserve these areas, the opportunities for hokum here are endless. Countries like Brazil and Indonesia already “protect” their rainforests, except, of course, from ranchers and palm oil raisers who ignore the protection. Brazil and Indonesia will nonetheless be happy to sell pollution credits for these lands.

And who is going call them on it? The polluter buying its way out of compliance? The Wall Street firm arranging the trading? It’s all a wink and a nod and a phony bookkeeping game.

Cap and trade systems never work as advertised. Often, they don’t work at all. The program inaugurated by the EU a few years back, for example, has been a near total failure.

Why, then, have so many government officials, nature’s official protectors of last resort, so readily bought into this approach to environmental protection? Part of the answer can be found in that old children’s fairy tale, “The Emperor’s New Cloths.” There, a group of sharpies convinced an insecure emperor and his advisors that only those deserving of their jobs could see the “magic clothe” the sharpies claimed to be weaving into royal garments. Today, government leaders afraid to let on they can’t think outside the box and don’t recognize the transcendental power of free markets to solve all sorts of challenges dully go along with emission trading promoters.

These same officials invariably say in public that they believe more environmentally sound production and distribution is the twenty-first century way to run an economy. Faced with big polluting interests who still want to run their companies in the old pollution-based twentieth century manner, however, these officials prefer pretend action to the real thing.

Ten years from now, perhaps even sooner, the cap and save approach to limiting pollution and saving the environment will be recognized as the Wall Street and big polluter created sham it so manifestly is. Enormous and quite possibly irreparable damages to the natural environment will be its legacy, and the frenzied finger pointing will be well underway.

We know how to check pollution. There’s no mystery here. No need for elaborate rationalizations and convoluted logic. Regulate emissions and enforce these regulations.

Free markets, denuded of needed regulation, aren’t the solution to every problem. In the wake of the sub-prime mortgage mess we should know that by now, The market isn’t the solution to pollution.

Our most basic planetary treasures are being made into the profit-generating plaything of phrase-mongering securities peddlers. Our children and their children will damn us for the intellectual foolishness and political cowardice that is allowing this to happen.

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Copyright 2008 The Moderate Voice
  • mikkel

    Michael, your analysis overlooks the key aspect of the whole program: it’s up to the government to decide what the caps are and to have regulation with extremely harsh punishment for going over them. The reason why the European system has failed is not because of the idea itself, but because the governments had an incentive to give out as many credits to their own companies as the companies wanted. They even artificially inflated the historical pollution numbers to make sure they could do this.

    The cap and trade system is not a free market regulatory device… is an aggregate regulator that the state must be willing to enforce, and the free market is used to give gains to companies that go beyond what they are required to do. Therefore, I think your criticism is slightly misdirected, as it should be at the politicians that refuse to actually use the program as it was meant.

  • Slamfu

    Damn skippy! I think the entire self policing nature of the free market is probably one of the biggest marketing/PR scams ever put forward by those who wish to pervert Adam Smith’s teachings for their own ends. So many would-be amateur capitalists buy into that BS. In a way its nice, it lets you know who is full of shit right away without any additional investigation needed.

    And screw the sub-prime fiasco, we can go back so far for the various catastrophes that have resulted from deregs we go full circle to the S&L’s bailouts in the 80’s and see where most of us heard of George W. Bush for the first time.

  • PaulSilver

    I thought that there is suppose to be a mechanism in cap and trade to regularly make the pollution standards more restrictive over time to force a gradual reduction of overall emissions?

  • mikkel

    Yes Paul there is. And I believe that it gets more restrictive at a faster and faster rate, so companies ahead (or behind) of the curve will have an exponential benefit (penalty).

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