Friday, June 05, 2009

Economic Clarity

In the May 26th post “End of An Age” made that argument that the twin problems of fossil fuel dependence and global warming have remained unsolved not for lack scientifically sound solutions. Rather the missing elements have been economic clarity and the resolve to take action.
For better or worse Congress has set its collective resolve behind a carbon cap and trade program. (See the May 29th post “Legislative Resolve.”) There is much room for criticism of the legislation, but in my view that is alright in as much as inaction presents a far greater risk than any risk from inequities in the draft legislation.

Despite its deficiencies, the cap and trade legislation now winding through Congress will serve us better than carbon taxes to next provide the economic clarity needed to invest in the best energy solutions.

Carbon taxes would simply punish a polluter and than remove capital from the hands of the business leaders who are best qualified to determine what technology and solutions will work best in their particular situation. The capital, siphoned off as taxes and penalties, would go to federal and state governments who are notoriously slow and inept at just about everything. It would be a monumental task to redeploy the capital in any meaningful or effective public program.

By contrast cap and trade is an iterative process that fits well with our market economy. It leaves the capital and the responsibility to find a solution in the hands of the people best able to choose among the various available technologies. Yes, some companies may choose to buy emission allowances in order to keep systems running as usual under the newly imposed carbon caps. However, how long can that last when the trade of allowances then becomes a matter of greater public scrutiny? Eventually, investors will push management to invest the capital in energy solutions.

It has only been recently that investors have begun to chastise public companies for inadequate disclosure of carbon emissions and environmental impact. A section on environmental sustainability was first added to Crystal Equity Research reports in 2008. The cost of inaction becomes real as the price of carbon emission allowances begins to flow through income statements and balance sheets.

In the first few years of implementation we expect inequities in whatever cap and trade program Congress might set up. The initial caps may be too high. Thin trading could mean too high prices. What better place to bring carbon prices into equilibrium than a free market?

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