Tuesday, May 12, 2009

Congressional Hearings on C&T Speculators

I am such a visionary. It turns out that some politicians are waking up to the fact that the much touted cap and trade solution to controlling greenhouse gases is really about the money, not the environment. Imagine that! Who, but a curmudgeon like me, would have thought that all those swell, well-meaning Al Gorites were really interested in creating an issue the solution to which made them billions. Sounds like "affordable housing" for all, the preface to the subprime debacle.

I would cordially invite you to visit my earlier blogs on these matters. The reason market capitalism is the greatest economic system the world has ever seen is that it permits people to be creative, sometimes too creative for the collective good. But maybe the collective good is human speak for what is best for "me."

Legislation & Policy Ernst and Young
Finance Committee Cap-and-Trade Hearing Focuses on Speculators

The Senate Finance Committee hearing on May 7, 2009, on "Auctioning Under Cap and Trade: Design, Participation, and Distribution of Revenues" focused heavily on the potential for speculators to manipulate the price of emissions allowances. In an opening statement, ranking Republican Charles Grassley (R-IA) said one troubling aspect of potential climate change legislation is that speculators "are foaming at the mouth to get at cap-and-trade profits," and hedge funds and private equity funds have been lobbying for a system to be put in effect. He later said Congress needs to keep in mind the public outrage over the price of gas, grains, foods, and alternative energy like biofuels, all of which have been the subject of manipulation by speculators.

"Some of us are going to be very careful about enhancing the role of speculators in this whole process of solving global warming," Grassley said. Similarly, Chairman Max Baucus (D-MT) said talk of auctioning allowances raises concerns about Wall Street wanting to manipulate prices, and asked how auctions could be monitored, what manipulation may or may not have occurred in existing auctions, and what manipulation may occur in a cap-and-trade auction.

Alan Krueger, Assistant Treasury Secretary for Economic Policy-Designate, said enforcement agencies have played a role in monitoring existing treasury auctions. Design features of an auction can have influence on its susceptibility to manipulation and there are ways of designing an auction to minimize manipulation and price volatility, he said.

Later, in response to a similar question from Sen. Bill Nelson (D-FL), Krueger said flexibility in the availability of allowances over time is one way of reducing the ability of speculators to manipulate prices. Krueger said one design issue is how long allowances can last, because a temporary shortfall could create a temporary opportunity to exploit limited supply. Allowing banking and borrowing of allowances over some period of time could limit the role of speculators, he said.

Sen. Maria Cantwell (D-WA) noted that Credit Suisse last November announced it had begun securitizing carbon deals in which bundled credits for 25 offset projects were into three tranches and sold to investors. "To me that sounds a lot like what we just did with the mortgage-backed securities that were at the heart of our meltdown," Cantwell said. She asked what lessons can be learned from the trading experience in Europe. Jos Delbeke, Deputy Director-General of the European Commission Directorate-General for the Environment, said liquidity of the market is very important, and prices in the European system have been relatively stable with normal fluctuations.

Krueger otherwise said, in response to a question from Chairman Baucus, that treasury is qualified to play a role in a cap-and-trade allowance auction because the agency has a tremendous amount of expertise and experience in auctioning and is willing to work with whatever agency is made responsible. Further, the auction theory branch of economics is quite well-developed, he said. "Treasury recognizes the critical importance of maintaining the integrity of, and ensuring investor confidence in, the market for its debt securities, including the proper dissemination of price and yield information," he said in written testimony.

Carbon Tax vs. Cap-and-Trade

The second major focus of the hearing was a carbon tax versus a cap-and-trade system. Sen. Grassley asked which provides more certainty for consumers and businesses, and which is more efficient. Krueger said a cap-and-trade system offers more certainty in curbing carbon emissions because of the certainty involved in the cap, and also offers much more flexibility. Douglas Elmendorf, Director, Congressional Budget Office, said a carbon tax is more efficient in terms of the timing of emissions reductions and because it reduces the volatility of the price of emissions, but there is less certainty in gauging the amount of emissions reduction at a given point in time.

Anne Smith, Vice President, Practice Leader of Climate & Sustainability, CRA International, said a carbon tax is more efficient than a carbon cap, though hybrid schemes to put price ceilings on top of a cap-and-trade system could move such a system closer to the efficiencies of a tax. On the subject of whether to auction emissions allowances or give them away, Smith said a cap-and-trade program with 100% auction of allowances would actually function much like any other cap-and-trade program that relies on free allocations: In the absence of any auction, if all the allowances are allocated to parties with compliance requirements, an allowance market forms naturally.

Member and witness statements from the hearing

For all of it's murk, cap and trade is about the money not greenhouse gases. Yogi was right. It is deja vu all over again.

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