by Eric de Place
Worries about “gaming” or market manipulation often crop up as objections to climate and energy legislation. While these concerns are understandable, they are not warranted—and they can be addressed in a well-designed system. So let’s look at some of the most common myths.
Myth #1: Cap-and-trade markets have no track record.
Reality: Cap-and-trade has been tested and proven in the United
State. More than a half dozen American cap-and-trade programs are already up and running—with no evidence of market manipulation.
The U.S. Acid Rain Program, administrated by the EPA, has a track
record dating to 1995. The program exceeded the SO2 emissions cap years
ahead of schedule and for only one-fourth the cost that was expected. After
more than a decade of operation, analysts have concluded that the SO2
cap-and-trade program has been successful and free of gaming.
The EPA also runs the NOx Budget Trading Program—designed to
reduce smog-contributors—which has been similarly successful, and free
of market shenanigans too.
The Regional Greenhouse Gas Initiative (RGGI), the nation’s first
climate cap-and-trade program, has been fully operational for more than
year—with great success. Close inspection has revealed no evidence of
anti-competitive conduct or market gaming. In fact, the program has met
its early goals so easily and so cheaply that some advocates are
calling for the carbon cap to be tightened ahead of schedule.
Myth #2: Europe’s cap-and-trade program has failed.
Reality: The European Union’s Emissions Trading Scheme (ETS),
begun in 2005, has created a Europe-wide carbon market that is a
remarkable success story—both environmentally and economically.
Thanks to the ETS, Europe is on track to meet its emissions-reduction obligations under the Kyoto Protocol.
Independent analyses have repeatedly confirmed that the carbon
markets have been effective at reducing emissions while remaining
largely free of interference.
In fairness, there were some hiccups in the rollout of the ETS—
including an initial overallocation of allowances to polluters,
insufficiently stringent offset provisions, and some price volatility.
Yet these problems resulted from European efforts to create a system on
“training wheels” without complete information. And in fact, the
problems are fixable and are already being addressed as the program
evolves. U.S. policymakers can learn from Europe’s early design mistakes,
but they should recognize that there are not fundamental flaws in the
policy or the carbon markets.
Myth #3: Carbon markets are at risk of Enron-style tricks or wild
derivatives speculation.
Reality: Common-sense regulation makes carbon markets no riskier
than the markets for pork bellies or soybean futures. As U.S.
cap-and-trade programs have demonstrated, well-regulated markets can
reduce pollution cost-effectively.
Restricting trading to registered exchanges is a smart idea, at
least at the outset of the program. One good example is the “Carbon
Market Oversight Act of 2009,” sponsored by Senators Dianne Feinstein
(D-Calif.) and Olympia Snowe (R-Maine), which puts the Commodity Futures
Trading Commission in charge of the carbon market, and creates other
restrictions on market behavior.
Other particulars of market design also help. To minimize price
volatility, authorities can ensure transparency about prices and the
number of permits available. Opening auctions to all bidders with
adequate financial reserves, conducting auctions frequently and early,
and limiting the number of permits any one actor may hold—all these
things will help keep prices stable and prevent market manipulation.
Carbon markets have built-in disincentives to manipulation: neither
the public wants it (because it could raise power bills), nor do the
market participants that buy permits (because they don’t want to pay
more to pollute).
Of course, as with any policy, cap-and-trade’s success will ultimately
depend on strong oversight, transparency, and vigorous enforcement. But
there is every reason to believe that a well-crafted and -regulated
system can function smoothly and cost-effectively.
This post originally appeared at Sightline’s Daily Score blog.
Related Links:
Sen. Blanche Lincoln faces a challenger from the left, but is he any better on the environment?
The ‘energy-only’ bill and Byron Dorgan’s deficit hypocrisy
Lindsey Graham’s dilemma, part two: Trying to deal a winning hand without ACES
