I'm a couple weeks behind this one, as all the media focus lately has been on the health care bill. I've had several interesting discussions around cap and trade lately that inspired me to put my thoughts down into a blog post.
I consider myself a fairly environmentally conscious person, I do believe based on data and observations human activity is creating a huge and very negative impact on the global climate. I'm extremely worried about the this planet over the next several decades. To me the health of this planet overrides any economic impacts of decisions, but at the same time I believe doing what is right for the planet can be done in ways that is also very economically beneficial in the long run. I'm not writing this post to debate these points...
Cap and Trade is a Wolf in Sheeps Clothing
The idea behind the bill sounds fine based on the highest level talking points, incentivize investment in alternative energy and at the same time disincentivize the polluters. Once you look under the hood though, the best phrase I can use to describe it, is "financial scam".
What got me looking at, and thinking about the impacts of the cap and trade bill was when I noticed the biggest supporters throwing the most lobbyists and money behind it was not the alternative energy industry but the Wall Street investment banks. Why?
It comes down to the whole "trade" part of the bill where carbon credits received can be traded/sold to carbon producers. It's been estimated that this could create the largest derivatives market, larger than the CDS's (credit default swaps). These credits would trade on an exchange (partially owned by Goldman Sachs) and would be a multi-billion dollar windfall for the investment banks.
Since the number of carbon credits available is fixed, and is reduced each year this creates a made in heaven market for large traders and speculators (hedge funds, investment banks). The carbon bubble will become the new credit bubble, as speculators suck productive money from the system.
Destructive Impacts on the Alternative Energy Industry
I've got a lot of friends involved in the alternative energy industry who believe this bill is a windfall for the industry and will spark the next big revolution in alternative industry. Be careful what you wish for, the long term impact on the industry may in fact be very destructive.
It's analogous to what happened with the housing market and credit bubble in 02-06 with all these new fangled mortgage products, CDO's, CDS'. Everybody touted these products as being great for the housing industry as they made housing more "affordable" and accessible to the masses. We now realize the truly destructive nature of these products, which incidentally were created by the same Wall Street banks behind the cap and trade bill.
Particularly as the price of carbon credits in driven up by speculators, it will become extremely profitable for companies producing them. The catch is the total number of credits is limited and there really isn't a direct tie between a technology being beneficial long-term, and producing carbon credits. You will see hundreds of companies pop up, simply built to capture huge profits from carbon credits, with technologies that otherwise would not make any sense.
In much the same way as imprudent lenders pitching alternative mortgage products forced prudent lenders out of the mortgage business, viable alternative energy technologies will be squeezed. Investment will be redirected from the productive to the speculative, with very negative consequences. Of course this bill is practically designed to create a "carbon bubble", who's popping in a few years, will sow yet another round of economic destruction laying waste to a whole industry while the pig men walk away with their sacks of money.